final10k2008.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    
For the fiscal year ended December 31, 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
(Address of principal executive offices)
63105-3443
(Zip code)
 
Registrant’s telephone number, including area code: (314) 480-1400
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of each class
 
 
Name of each exchange
on which registered
 
 
Common Stock,
par value $1 per share
New York Stock Exchange
 
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    x    No    ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes    ¨    No    x
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
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 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 ¨ 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, the aggregate market value of registrant’s common stock, par value $1 per share, held by non-affiliates of registrant was approximately $1,967,437,995 based on the closing sale price as reported on the New York Stock Exchange.
 
As of January 30, 2009, 77,402,728 shares of the registrant’s common stock were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in this Form 10-K
as indicated herein:
 
     
Document
 
Part of 10-K into which incorporated
Proxy Statement relating to Olin’s 2009
Annual Meeting of Shareholders
to be held on April 23, 2009
 
Part III


 
1

 
 

PART I
 
Item 1.  BUSINESS
 
GENERAL
 
Olin Corporation is a Virginia corporation, incorporated in 1892, having its principal executive offices in Clayton, MO. We are a manufacturer concentrated in two business segments: Chlor Alkali Products and Winchester®. Chlor Alkali Products manufactures and sells chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, bleach products and potassium hydroxide, which represent 72% of 2008 sales. Winchester products, which represent 28% of 2008 sales, include sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges. See our discussion of our segment disclosures contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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’ operating results and cash flows are reported as discontinued operations in the Consolidated Statements of Operations and Consolidated 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.
 
GOVERNANCE
 
We maintain an Internet website at www.olin.com. Our reports on Form 10-K, Form 10-Q, and Form 8-K, as well as amendments to those reports, are available free of charge on our website, as soon as reasonably practicable after we file the reports with the Securities and Exchange Commission (SEC). Additionally, a copy of our SEC filings can be obtained at the SEC at their Office of Investor Education and Advocacy at 100 F Street, N.E., Washington, D.C. 20549 or by calling that office of the SEC at 1-800-SEC-0330. Also, a copy of our electronically filed materials can be obtained at www.sec.gov. Our Principles of Corporate Governance, Committee Charters and Code of Conduct are available on our website at www.olin.com in the Governance Section under Governance Documents and Committees or from us by writing to: George Pain, Vice President, General Counsel and Secretary, Olin Corporation, 190 Carondelet Plaza, Suite 1530, Clayton, MO 63105.
 
In May 2008, our Chief Executive Officer executed the annual Section 303A.12(a) CEO Certification required by the New York Stock Exchange (NYSE), certifying that he was not aware of any violation of the NYSE’s corporate governance listing standards by us. Additionally, our Chief Executive Officer and Chief Financial Officer executed the required Sarbanes-Oxley Act of 2002 (SOX) Sections 302 and 906 certifications relating to this Annual Report on Form 10-K, which are filed with the SEC as exhibits to this Annual Report on Form 10-K.
 
PRODUCTS, SERVICES AND STRATEGIES
 
Chlor Alkali Products
 
Products and Services
 
We have been involved in the U.S. chlor alkali industry for more than 100 years and are a major participant in the North American chlor alkali market. Chlorine and caustic soda are co-produced commercially by the electrolysis of salt. These co-products are produced simultaneously, and in a fixed ratio of 1.0 ton of chlorine to 1.1 tons of caustic soda. The industry refers to this as an Electrochemical Unit or ECU. With a demonstrated capacity as of the end of 2008 of 1.91 million ECUs per year, including 50% of the production from our partnership with PolyOne Corporation (PolyOne), which we refer to as SunBelt, we are the third largest chlor alkali producer, measured by production volume of chlorine and caustic soda, in North America, according to data from Chemical Market Associates, Inc. (CMAI). CMAI is a global petrochemical, plastics and fibers consulting firm established in 1979. Approximately 55% of our caustic soda production is high purity membrane and rayon grade, which, according to CMAI data, normally commands a premium selling price in the market. According to data from CMAI, we are the largest North American producer of industrial bleach, which is manufactured using both chlorine and caustic soda.

 
2

 
 

 
Our manufacturing facilities in Augusta, GA; McIntosh, AL; Charleston, TN; St. Gabriel, LA; Henderson, NV; Becancour, Quebec; and a portion of our facility in Niagara Falls, NY are ISO 9002 certified.  In addition, Augusta, GA; McIntosh, AL; Charleston, TN; and Niagara Falls, NY are ISO 14001 certified.  ISO 9000 (which includes ISO 9001 and ISO 9002) and ISO 14000 (which includes ISO 14001) are sets of related international standards on quality assurance and environmental management developed by the International Organization for Standardization to help companies effectively document the quality and environmental management system elements to be implemented to maintain effective quality and environmental management systems. Our facilities in Augusta, GA; McIntosh, AL; Charleston, TN; Niagara Falls, NY; and St. Gabriel, LA have also achieved Star status in the Voluntary Protection Program (VPP) of the Occupational Safety and Health Administration (OSHA). OSHA’s VPP is a program in which companies voluntarily participate that recognizes facilities for their exemplary safety and health programs. Our Augusta, GA; McIntosh, AL; Charleston, TN; and Niagara Falls, NY chlor alkali manufacturing sites and the division headquarters are accredited under the RC 14001 Responsible Care® (RC 14001) standard. Supported by the chemical industry and recognized by government and regulatory agencies, RC 14001 establishes requirements for the management of safety, health, environmental, security, transportation, product stewardship, and stakeholder engagement activities for the business.
 
Chlorine is used as a raw material in the production of thousands of products for end-uses including vinyls, chlorinated intermediates, isocyanates, and water treatment.  A significant portion of U.S. chlorine production is consumed in the manufacture of ethylene dichloride, or EDC, a precursor for polyvinyl chloride, or PVC. PVC is a plastic used in applications such as vinyl siding, plumbing and automotive parts.  We estimate that approximately 16% of our chlorine produced, including the production from our share of SunBelt, is consumed in the manufacture of EDC.  While much of the chlorine produced in the U.S. is consumed by the producing company to make downstream products, we sell most of the chlorine we produce to third parties in the merchant market.
 
Caustic soda has a wide variety of end-use applications, the largest of which is in the pulp and paper industry used in the delignification and bleaching portion of the pulping process. Caustic soda is also used in the production of detergents and soaps, alumina and a variety of other inorganic and organic chemicals.
 
The chlor alkali industry is cyclical, both as a result of changes in demand for each of the co-products and as a result of the large increments in which new capacity is added. Because chlorine and caustic are produced in a fixed ratio, the supply of one product can be constrained both by the physical capacity of the production facilities and/or by the ability to sell the co-product. Prices for both products respond rapidly to changes in supply and demand. Our ECU netbacks (defined as gross selling price less freight and discounts) averaged approximately $635, $535 and $550 per ECU in 2008, 2007 and 2006, respectively.

Beginning in late 2006, driven by reduced levels of chlorine demand and a series of planned and unplanned plant maintenance outages, chlor alkali plant operating rates for the industry were reduced.  While this allowed chlorine supply to stay balanced, it caused caustic soda demand, which did not experience a decline, to exceed supply.  This led to industry-wide caustic soda price increases.  During the first three quarters of 2008, North American demand for caustic soda remained strong.  However, caustic soda supply continued to be constrained by the weakness in chlorine demand, which caused operating rates to be reduced.  This resulted in a significant supply and demand imbalance for caustic soda in North America.  This imbalance, combined with increased freight and energy costs, resulted in our achieving record levels of caustic soda pricing.  During the fourth quarter of 2008, North American caustic soda demand weakened but less than the decline in chlorine demand.  This caused the caustic soda supply and demand imbalance to continue, which continued to support record levels of caustic soda prices. While we have seen sequential improvements in caustic soda pricing beginning with the fourth quarter of 2006, we have continued to experience weaker chlorine prices.  Chlorine prices have declined quarterly since the third quarter of 2007.
 
Electricity and salt are the major purchased raw materials for our Chlor Alkali Products segment. Raw materials represent approximately 55% of the total cost of producing an ECU. Electricity is the single largest raw material component in the production of chlor alkali products. During the past five years, we experienced an increase in the cost of electricity from our suppliers due primarily to energy cost increases and regulatory requirements. We are supplied by utilities that primarily utilize coal, hydroelectric, natural gas, and nuclear power. The commodity nature of this industry places an added emphasis on cost management and we believe that we have managed our manufacturing costs in a manner that makes us one of the low cost producers in the industry. We are currently investing in a conversion and expansion project at our St. Gabriel, LA facility which will increase capacity at that location from 197,000 ECUs to 246,000 ECUs and is expected to significantly reduce the site’s manufacturing costs.  We expect to complete this conversion and expansion project during the second quarter of 2009.  In addition, as market demand requires, we believe the design of the SunBelt plant, as well as the new design of the St. Gabriel, LA facility, will enable us to expand capacity cost-effectively at these locations.
 
We also manufacture and sell other chlor alkali-related products and we recently invested in capacity and product upgrades in some of these areas. These products include chemically processed salt, hydrochloric acid, sodium hypochlorite (bleach), hydrogen, sodium hydrosulfite, and potassium hydroxide.

 
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The following table lists products of our Chlor Alkali Products business, with principal products on the basis of annual sales highlighted in bold face.
 
Products & Services
 
Major End Uses
 
Plants & Facilities
 
Major Raw Materials & Components for Products/Services
Chlorine/caustic soda
 
Pulp & paper processing, chemical manufacturing, water purification, manufacture of vinyl chloride, bleach, swimming pool chemicals & urethane chemicals
 
Augusta, GA
Becancour, Quebec
Charleston, TN
Henderson, NV
McIntosh, AL
Niagara Falls, NY
St. Gabriel, LA
 
salt, electricity
             
Sodium hypochlorite
(bleach)
 
Household cleaners, laundry bleaching, swimming pool sanitizers, semiconductors, water treatment, textiles, pulp & paper and food processing
 
Augusta, GA
Becancour, Quebec
Charleston, TN
Henderson, NV
McIntosh, AL
Niagara Falls, NY
Santa Fe Springs, CA
Tacoma, WA
Tracy, CA
 
chlorine, caustic soda
             
Hydrochloric acid
 
Steel, oil & gas, plastics, organic chemical synthesis, water and wastewater treatment, brine treatment, artificial sweeteners, pharmaceuticals, food processing and ore
and mineral processing
 
Augusta, GA
Becancour, Quebec
Charleston, TN
Henderson, NV
McIntosh, AL
Niagara Falls, NY
 
chlorine, hydrogen
             
Potassium hydroxide
 
Fertilizer manufacturing, soaps, detergents
and cleaners, battery manufacturing, food processing chemicals and deicers
 
Charleston, TN
 
potassium chloride, electricity
             
Hydrogen
 
Fuel source, hydrogen peroxide and hydrochloric acid
 
Augusta, GA
Becancour, Quebec
Charleston, TN
Henderson, NV
McIntosh, AL
Niagara Falls, NY
St. Gabriel, LA
 
salt, electricity
             
Sodium hydrosulfite
 
Paper, textile & clay bleaching
 
Charleston, TN
 
caustic soda, sulfur dioxide
 
Strategies
 
Continued Role as a Preferred Supplier to Merchant Market Customers.    Based on our market research, we believe our Chlor Alkali Products business is viewed as a preferred supplier by our merchant market customers. We will continue to focus on providing quality customer service support and developing relationships with our valued customers.
 
Pursue Incremental Expansion Opportunities.    We have invested in capacity and product upgrades in our chemically processed salt, hydrochloric acid, bleach, potassium hydroxide and hydrogen businesses. These expansions increase our captive use of chlorine while increasing the sales of these co-products. These niche businesses provide opportunities to upgrade chlorine and caustic to higher value-added applications. We also have the opportunity, when business conditions permit, to pursue incremental expansion through SunBelt and at St. Gabriel, LA after completion of the current conversion and expansion project.

 
4

 
 

Winchester
 
Products and Services
 
Winchester is in its 142nd year of operation and its 78th year as part of Olin. Winchester is a premier developer and manufacturer of small caliber ammunition for sale to domestic and international retailers (commercial customers), law enforcement agencies and domestic and international militaries. We believe we are a leading U.S. producer of ammunition for recreational shooters, hunters, law enforcement agencies and the U.S. Armed Forces. As an example of our law enforcement business, the Federal Bureau of Investigation (FBI) awarded Winchester a five-year contract in 2007 for bonded pistol ammunition.  Our legendary Winchester® product line includes all major gauges and calibers of shotgun shells, rimfire and centerfire ammunition for pistols and rifles, reloading components and industrial cartridges. We believe we are the leading U.S. supplier of small caliber commercial ammunition. As part of our continuous improvement initiatives, our manufacturing facility in Oxford, MS achieved ISO 9001:2000 certification in 2008.  Our manufacturing facility in East Alton, IL had previously achieved ISO 9001:2000 certification in 2006.
 
Winchester has strong relationships throughout the sales and distribution chain and strong ties to traditional dealers and distributors. Winchester has built its business with key high volume mass merchants and specialty sporting goods retailers. We have consistently developed industry-leading ammunition. In 2008, Winchester was named “2008 Ammunition Manufacturer of the Year” by the National Association of Sporting Goods Wholesalers.  In 2007, Winchester® Supreme Elite™ XP3® centerfire rifle product line was honored with the National Rifle Association’s “Golden Bullseye Award” in the ammunition category.  In addition, two Winchester loads were selected by Outdoor Life magazine to receive the “2007 Editor’s Choice” award for new ammunition products:  Winchester® WinLite® Low Recoil Target Loads received the designation in the Target/Wingshooting Shotshell category, while Winchester® Supreme® Partition Gold® .460 S&W was honored in the Handgun ammunition category.  Winchester® WinLite® 20-Gauge Low Recoil Target Load was additionally highlighted in Field & Stream magazine’s “2007 Gear of the Year” feature.
 
Winchester purchases raw materials such as copper-based strip and ammunition cartridge case cups and lead from vendors based on a conversion charge or premium.  These conversion charges or premiums are in addition to the market prices for metal as posted on exchanges such as the Commodity Exchange, or COMEX, and London Metals Exchange, or LME. Winchester’s other main raw material is propellant, which is purchased predominantly from one of the United States’ largest propellant suppliers.
 
The following table lists products and services of our Winchester business, with principal products on the basis of annual sales highlighted in bold face.
 
Products & Services
 
Major End Uses
 
Plants & Facilities
 
Major Raw Materials & Components for Products/Services
Winchester® sporting ammunition (shot-shells, small caliber centerfire & rimfire ammunition)
 
Hunters & recreational shooters, law enforcement agencies
 
East Alton, IL
Oxford, MS
Geelong, Australia
 
brass, lead, steel, plastic, propellant, explosives
             
Small caliber military ammunition
 
Infantry and mounted weapons
 
East Alton, IL
Oxford, MS
 
brass, lead, propellant, explosives
             
Industrial products (8 gauge loads & powder-actuated tool loads)
 
Maintenance applications in power &
concrete industries, powder-actuated tools in construction industry
 
East Alton, IL
Oxford, MS
Geelong, Australia
 
brass, lead, plastic, propellant, explosives
 
Strategies
 
Leverage Existing Strengths.    Winchester plans to seek new opportunities to leverage the legendary Winchester brand name and will continue to offer a full line of ammunition products to the markets we serve, with specific focus on investments that lower our costs and that make Winchester ammunition the retail brand of choice.
 
Focus on Product Line Growth.    With a long record of pioneering new product offerings, Winchester has built a strong reputation as an industry innovator. This includes the introduction of reduced-lead and non-lead products, which are growing in popularity for use in indoor shooting ranges and for outdoor hunting.

 
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INTERNATIONAL OPERATIONS
 
Our subsidiary, PCI Chemicals Canada Company/Société PCI Chimie Canada, operates one chlor alkali facility in Becancour,  Canada, which sells chlor alkali-related products within Canada and to the United States.  Our subsidiary, Winchester Australia Limited, loads and packs sporting and industrial ammunition in Australia. See the Note “Segment Information” of the Notes to Consolidated Financial Statements in Item 8, for geographic segment data. We are incorporating our segment information from that Note into this section of our Form 10-K.
 
CUSTOMERS AND DISTRIBUTION
 
During 2008, no single customer accounted for more than 8% of sales. Sales to all U.S. government agencies and sales under U.S. government contracting activities in total accounted for approximately 3% of sales in 2008. Products we sell to industrial or commercial users or distributors for use in the production of other products constitute a major part of our total sales. We sell some of our products, such as caustic soda and sporting ammunition, to a large number of users or distributors, while we sell others, such as chlorine, in substantial quantities to a relatively small number of industrial users. We discuss the customers for each of our two businesses in more detail above under “Products and Services.”
 
We market most of our products and services primarily through our sales force and sell directly to various industrial customers, wholesalers, other distributors, and the U.S. Government and its prime contractors.
 
Because we engage in some government contracting activities and make sales to the U.S. Government, we are subject to extensive and complex U.S. Government procurement laws and regulations. These laws and regulations provide for ongoing government audits and reviews of contract procurement, performance and administration. Failure to comply, even inadvertently, with these laws and regulations and with laws governing the export of munitions and other controlled products and commodities could subject us or one or more of our businesses to civil and criminal penalties, and under certain circumstances, suspension and debarment from future government contracts and the exporting of products for a specified period of time.
 
BACKLOG

The total amount of contracted backlog was approximately $228.8 million and $128.5 million as of January 31, 2009 and 2008, respectively.  The backlog orders are in our Winchester business.  Backlog is comprised of all open customer orders not yet shipped.  Approximately 85% of contracted backlog as of January 31, 2009 is expected to be filled during 2009.

COMPETITION
 
We are in active competition with businesses producing the same or similar products, as well as, in some instances, with businesses producing different products designed for the same uses.

Chlor alkali manufacturers in North America, with approximately 15.1 million tons of chlorine and 16.0 million tons of caustic soda capacity, account for approximately 20% of worldwide chlor alkali production capacity. According to CMAI,  the Dow Chemical Company (Dow), and the Occidental Chemical Corporation (OxyChem), are the two largest chlor alkali producers in North America.  Approximately 75% of the total North American capacity is located in the U.S. Gulf Coast region.

Many of our competitors are integrated producers of chlorine, using some of, or all, of their chlorine production in the manufacture of other downstream products.  In contrast, we are primarily a merchant producer of chlorine and sell the majority of our chlorine to merchant customers.  We do utilize chlorine to manufacture industrial bleach and hydrochloric acid.  As a result, we supply a greater share of the merchant chlorine market than our share of overall industry capacity.   There is a worldwide market for caustic soda, which attracts imports and allows exports depending on market conditions.  All of our competitors sell caustic soda into the North American market.

The chlor alkali industry in North America is highly competitive, and many of our competitors, including Dow and OxyChem, are substantially larger and have greater financial resources than we do. While the technologies to manufacture and transport chlorine and caustic soda are widely available, the production facilities require large capital investments, and are subject to significant regulatory and permitting requirements.

We are among the largest manufacturers in the United States of commercial small caliber ammunition based on data provided by the Sporting Arms and Ammunition Manufacturers’ Institute (SAAMI). Founded in 1926, SAAMI is an association of the nation’s leading manufacturers of sporting firearms, ammunition and components. According to SAAMI, in addition to our Winchester business, Alliant Techsystems Inc. (ATK) and Remington Arms Company, Inc. (Remington) are the three largest commercial ammunition manufacturers in the United States.  The ammunition industry is highly competitive with us, ATK, Remington, numerous smaller domestic manufacturers and foreign producers competing for sales to the commercial ammunition customers. Many factors influence our ability to compete successfully, including price, delivery, service, performance, product innovation and product recognition and quality, depending on the product involved.

 
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EMPLOYEES
 
As of December 31, 2008, we had approximately 3,600 employees, with 3,400 working in the United States and 200 working in foreign countries, primarily Canada. Various labor unions represent a majority of our hourly-paid employees for collective bargaining purposes.
 
The following labor contracts are scheduled to expire in 2009 or early 2010:

Location
 
Number of Employees
 
Expiration Date
Tacoma, WA (Chlor Alkali)
 
13
 
December 2009
Henderson, NV (Chlor Alkali)
 
73
 
March 2010

While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude these labor contracts or any other labor agreements without work stoppages and cannot assure that any work stoppages will not have a material adverse effect on our business, financial condition, or results of operations.
 
RESEARCH ACTIVITIES; PATENTS
 
Our research activities are conducted on a product-group basis at a number of facilities. Company-sponsored research expenditures were $2.0 million in 2008 and 2007 and $1.8 million in 2006.
 
We own or license a number of patents, patent applications, and trade secrets covering our products and processes. We believe that, in the aggregate, the rights under our patents and licenses are important to our operations, but we do not consider any individual patent or license or group of patents and licenses related to a specific process or product to be of material importance to our total business.
 
RAW MATERIALS AND ENERGY
 
We purchase the major portion of our raw material requirements. The principal basic raw materials for our production of chlor alkali products are salt, electricity, potassium chloride, sulfur dioxide, and hydrogen. A portion of the salt used in our Chlor Alkali Products segment is produced from internal resources. Lead, brass, and propellant are the principal raw materials used in the Winchester business. We typically purchase our electricity, salt, potassium chloride, sulfur dioxide, ammunition cartridge case cups and copper-based strip, and propellants pursuant to multi-year contracts.  We provide additional information with respect to specific raw materials in the tables above under “Products and Services.”
 
Electricity is the predominant energy source for our manufacturing facilities. Most of our facilities are served by utilities which generate electricity principally from coal, hydroelectric and nuclear power except at St. Gabriel, LA and Henderson, NV which predominantly use natural gas.
 
ENVIRONMENTAL AND TOXIC SUBSTANCES CONTROLS
 
In the United States, the establishment and implementation of federal, state and local standards to regulate air, water and land quality affect substantially all of our manufacturing locations. Federal legislation providing for regulation of the manufacture, transportation, use and disposal of hazardous and toxic substances, and remediation of contaminated sites has imposed additional regulatory requirements on industry, particularly the chemicals industry. In addition, implementation of environmental laws, such as the Resource Conservation and Recovery Act and the Clean Air Act, has required and will continue to require new capital expenditures and will increase operating costs. Our Canadian facility is governed by federal environmental laws administered by Environment Canada and by provincial environmental laws enforced by administrative agencies. Many of these laws are comparable to the U.S. laws described above.  We employ waste minimization and pollution prevention programs at our manufacturing sites and we are a party to various governmental and private environmental actions associated with former waste disposal sites and past manufacturing facilities. Charges or credits to income for investigatory and remedial efforts were material to operating results in the past three years and may be material to net income in future years.

See our discussion of our environmental matters in Item 3, “Legal Proceedings” below, the Note “Environmental” of the Notes to Consolidated Financial Statements contained in Item 8, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Item 1A.  RISK FACTORS
 
In addition to the other information in this Form 10-K, the following factors should be considered in evaluating Olin and our business. All of our forward-looking statements should be considered in light of these factors. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect us.
 

 
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Sensitivity to Global Economic Conditions and Cyclicality—Our operating results could be negatively affected during economic downturns.
 
The business of most of our customers, particularly our vinyl, urethanes, and pulp and paper customers are, to varying degrees, cyclical and have historically experienced periodic downturns. These economic and industry downturns have been characterized by diminished product demand, excess manufacturing capacity and, in some cases, lower average selling prices. Therefore, any significant downturn in our customers’ businesses or in global economic conditions could result in a reduction in demand for our products and could adversely affect our results of operations or financial condition.
 
Although we do not generally sell a large percentage of our products directly to customers abroad, a large part of our financial performance is dependent upon a healthy economy beyond the United States. Our customers sell their products abroad. As a result, our business is affected by general economic conditions and other factors in Western Europe and most of East Asia, particularly China and Japan, including fluctuations in interest rates, customer demand, labor costs, currency changes, and other factors beyond our control. The demand for our customers’ products, and therefore, our products, is directly affected by such fluctuations. In addition, our customers could decide to move some or all of their production to lower cost, offshore locations, and this could reduce demand in the United States for our products. We cannot assure you that events having an adverse effect on the industries in which we operate will not occur or continue, such as a downturn in the Western European, Asian or world economies, increases in interest rates, or unfavorable currency fluctuations.  Economic conditions in other regions of the world, predominantly Asia and Europe, can increase the amount of caustic soda produced and available for export to North America.  The increased caustic soda supply can put downward pressure on our caustic soda prices, negatively impacting our profitability.
 
Cyclical Pricing Pressure—Our profitability could be reduced by declines in average selling prices of our products, particularly declines in the ECU netback for chlorine and caustic.
 
Our historical operating results reflect the cyclical and sometimes volatile nature of the chemical and ammunition industries. We experience cycles of fluctuating supply and demand in each of our business segments, particularly in Chlor Alkali Products, which results in changes in selling prices. Periods of high demand, tight supply and increasing operating margins tend to result in increases in capacity and production until supply exceeds demand, generally followed by periods of oversupply and declining prices.  The only significant chlor alkali capacity (over 100,000 annual ECU’s) which became operational during 2008 was at the Shintech facility in Plaquemine, LA. Shintech has also announced capacity increases for 2009 and 2010.  In North America, because Shintech consumes the chlorine it produces, this expansion may result in more caustic soda supply in the market.  Dow has announced the permanent closure in 2009 of their Oyster Creek (Freeport), TX facility.  Another factor influencing demand and pricing for chlorine and caustic soda is the price of natural gas. Higher natural gas prices increase our customers’ and competitors’ manufacturing costs, and depending on the ratio of crude oil to gas prices, could make them less than competitive in world markets; and therefore, may result in reduced demand for our products. Continued expansion offshore, particularly in Asia, will continue to have an impact on the ECU values as imported caustic soda replaces some capacity in the U.S.

Price in the chlor alkali industry is a major supplier selection criterion. We have little or no ability to influence prices in this large commodity market. Decreases in the average selling prices of our products could have a material adverse effect on our profitability. For example, assuming all other costs remain constant and internal consumption remains approximately the same, a $10 per ECU selling price change equates to an approximate $17 million annual change in our revenues and pretax profit when we are operating at full capacity. While we strive to maintain or increase our profitability by reducing costs through improving production efficiency, emphasizing higher margin products, and by controlling transportation, selling, and administration expenses, we cannot assure you that these efforts will be sufficient to offset fully the effect of changes in pricing on operating results.
 
Because of the cyclical nature of our businesses, we cannot assure you that pricing or profitability in the future will be comparable to any particular historical period, including the most recent period shown in our operating results. We cannot assure you that the chlor alkali industry will not experience adverse trends in the future, or that our operating results and/or financial condition will not be adversely affected by them.
 
Our Winchester segment is also subject to changes in operating results as a result of cyclical pricing pressures, but to a lesser extent than the Chlor Alkali Products segment. Selling prices of ammunition are affected by changes in raw material costs and availability and customer demand, and declines in average selling prices of our Winchester segment could adversely affect our profitability.

 
8

 
 

 
Imbalance in Demand for Our Chlor Alkali Products—A loss of a substantial customer for our chlorine or caustic soda could cause an imbalance in demand for these products, which could have an adverse effect on our results of operations.
 
Chlorine and caustic soda are produced simultaneously and in a fixed ratio of 1.0 ton of chlorine to 1.1 tons of caustic soda. The loss of a substantial chlorine or caustic soda customer could cause an imbalance in demand for our chlorine and caustic soda products. An imbalance in demand may require us to reduce production of both chlorine and caustic soda or take other steps to correct the imbalance. Since we cannot store chlorine, we may not be able to respond to an imbalance in demand for these products as quickly or efficiently as some of our competitors. If a substantial imbalance occurred, we would need to reduce prices or take other actions that could have a negative impact on our results of operations and financial condition.
 
Environmental Costs—We have ongoing environmental costs, which could have a material adverse effect on our financial position or results of operations.
 
The nature of our operations and products, including the raw materials we handle, exposes us to the risk of liabilities or claims with respect to environmental matters.  In addition, we are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites.  We have incurred, and expect to incur, significant costs and capital expenditures in complying with environmental laws and regulations.
 
The ultimate costs and timing of environmental liabilities are difficult to predict. Liabilities under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party could be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. We could incur significant costs, including cleanup costs, natural resources damages, civil or criminal fines and sanctions and third-party lawsuits claiming, for example, personal injury and/or property damage, as a result of past or future violations of, or liabilities under, environmental or other laws.
 
In addition, future events, such as changes to or more rigorous enforcement of environmental laws, could require us to make additional expenditures, modify or curtail our operations and/or install pollution control equipment.
 
Accordingly, it is possible that some of the matters in which we are involved or may become involved may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Environmental Matters.”
 
Pension Plans—The impact of declines in global equity markets on asset values and any declines in interest rates used to value the liabilities in our pension plan may result in higher pension costs and the need to fund the pension plan in future years in material amounts.
 
In May 2007 and September 2006, we made voluntary pension plan contributions of $100.0 million and $80.0 million, respectively.

Under Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (SFAS No. 158), we recorded an after-tax charge of $99.4 million ($162.7 million pretax) to Shareholders’ Equity as of December 31, 2008 for our pension and other postretirement plans.  This charge reflected the unfavorable performance on plan assets during 2008.  In 2007, we recorded a $138.3 million after-tax credit ($226.6 million pretax) to Shareholders’ Equity as of December 31, 2007 for our pension and other postretirement plans.  This credit reflected a 25-basis point increase in the plans’ discount rate, combined with an increase in the value of the plan assets from favorable plan performance and the $100.0 million contribution.   In 2006, we recorded an after-tax credit of $54.5 million ($89.2 million pretax) to Shareholders’ Equity as a result of a decrease in the accumulated pension benefit obligation, which resulted primarily from a 25-basis point increase in the plan discount rate, combined with an increase in the value of the plan assets from favorable plan performance and the $80.0 million contribution. In 2006, we adopted SFAS No. 158, which required us to record a net liability or asset to report the funded status of our defined benefit pension and other postretirement plans on our balance sheet. As a result, we recorded after-tax charges to Shareholders’ Equity of $39.7 million and $33.6 million for the pension and other postretirement plans, respectively ($65.0 million and $55.0 million pretax, respectively).  The non-cash charges or credits to Shareholders’ Equity do not affect our ability to borrow under our senior revolving credit agreement.
 

 
9

 
 

During 2007, the asset allocation in the plan was adjusted to insulate the plan from discount rate risk and reduce the plan’s exposure to equity investments.  Effective January 1, 2008, we froze our defined benefit pension plan for salaried and certain non-bargained hourly workers and these employees began to participate in a defined contribution pension plan.  In 2009, we expect pension income associated with the defined benefit plan to be higher compared to 2008.  The increase is primarily the result of the absence of the $4.1 million curtailment charges, which were included in 2008, but also reflects the combination of the unfavorable returns on plan assets in 2008, offset by the favorable impact of the 2008 plan curtailments.

The determinations of pension expense and pension funding are based on a variety of rules and regulations. Changes in these rules and regulations could impact the calculation of pension plan liabilities and the valuation of pension plan assets. They may also result in higher pension costs, additional financial statement disclosure, and accelerate and increase the need to fully fund the pension plan. During the third quarter of 2006, the “Pension Protection Act of 2006” became law, amended by “The Worker, Retiree, and Employer Recovery Act,” during the fourth quarter of 2008. Among the stated objectives of the laws were the protection of both pension beneficiaries and the financial health of the Pension Benefit Guaranty Corporation (PBGC). To accomplish these objectives, the new laws required sponsors to fund defined benefit pension plans earlier than previous requirements and to pay increased PBGC premiums.  Based on the combination of the asset allocation adjustment, the favorable asset performance in 2006 and 2007, the $100.0 million and $80.0 million voluntary contributions, and the benefits from the plan freeze, offset by the unfavorable performance on plan assets in 2008, we will not be required to make any cash contributions to the domestic defined benefit pension plan at least through 2009.  At December 31, 2008, the projected benefit obligation of our defined pension plan of $1,644.0 million exceeded the market value of assets in our defined pension plan by $1.7 million.

In addition, the impact of declines in global equity and bond markets on asset values may result in higher pension costs and may increase and accelerate the need to fund the pension in future years. For example, holding all other assumptions constant, a 100-basis point decrease or increase in the assumed rate of return on plan assets would have decreased or increased, respectively, the 2008 qualified pension plan income by approximately $15.0 million.

Holding all other assumptions constant, a 50-basis point decrease in the discount rate used to calculate pension income for 2008 and the projected benefit obligation as of December 31, 2008 would have decreased pension income by $0.8 million and increased the projected benefit obligation by $79.0 million. A 50-basis point increase in the discount rate used to calculate pension income for 2008 and the projected benefit obligation as of December 31, 2008 would have increased pension income by $1.9 million and decreased the projected benefit obligation by $79.0 million.
 
Litigation and Claims—We are subject to litigation and other claims, which could cause us to incur significant expenses.
 
We are a defendant in a number of pending legal proceedings relating to our present and former operations. These include proceedings alleging injurious exposure of plaintiffs to various chemicals and other substances (including proceedings based on alleged exposures to asbestos). Frequently, such proceedings involve claims made by numerous plaintiffs against many defendants. However, because of the inherent uncertainties of litigation, we are unable to predict the outcome of these proceedings and therefore cannot determine whether the financial impact, if any, will be material to our financial position or results of operations.
 
Security and Chemicals Transportation—New regulations on the transportation of hazardous chemicals and/or the security of chemical manufacturing facilities and public policy changes related to transportation safety could result in significantly higher operating costs.
 
The chemical industry, including the chlor alkali industry, has proactively responded to the issues related to national security and environmental concerns by starting new initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States. Government at the local, state, and federal levels also has begun regulatory processes which could lead to new regulations that would impact the security of chemical plant locations and the transportation of hazardous chemicals. Our Chlor Alkali business could be adversely impacted by the cost of complying with any new regulations. Our business also could be adversely affected because of an incident at one of our facilities or while transporting product. The extent of the impact would depend on the requirements of future regulations and the nature of an incident, which are unknown at this time.
 
Production Hazards—Our facilities are subject to operating hazards, which may disrupt our business.
 
We are dependent upon the continued safe operation of our production facilities. Our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products and ammunition, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unexpected utility disruptions or outages, unscheduled downtime and environmental hazards. From time to time in the past, we have had incidents that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for workplace injuries and fatalities. Some of our products involve the manufacture and/or handling of a variety of explosive and flammable materials. Use of these products by our customers could also result in liability if an explosion, fire, spill or other accident were to occur. We cannot assure you that we will not experience these types of incidents in the future or that these incidents will not result in production delays or otherwise have a material adverse effect on our business, financial condition or results of operations.
 

 
10

 
 

Cost Control—Our profitability could be reduced if we continue to experience increasing raw material, utility, transportation or logistics costs, or if we fail to achieve our targeted cost reductions.

Our operating results and profitability are dependent upon our continued ability to control, and in some cases further reduce, our costs. If we are unable to do so, or if costs outside of our control, particularly our costs of raw materials, utilities, transportation and similar costs, increase beyond anticipated levels, our profitability will decline.
 
Indebtedness—Our indebtedness could adversely affect our financial condition and limit our ability to grow and compete, which could prevent us from fulfilling our obligations under our indebtedness.
 
As of December 31, 2008, we had $252.4 million of indebtedness outstanding, including $11.3 million representing the fair value related to $101.6 million of interest rate swaps in effect at December 31, 2008 and excluding our guarantee of $54.8 million of indebtedness of SunBelt. This does not include our $240.0 million senior revolving credit facility of which we had $207.1 million available on that date because we had issued $32.9 million of letters of credit. As of December 31, 2008, our indebtedness represented 26.4% of our total capitalization.  At December 31, 2008, none of our indebtedness was due within one year.
 
Our indebtedness could adversely affect our financial condition and limit our ability to grow and compete, which in turn could prevent us from fulfilling our obligations under our indebtedness. Despite our level of indebtedness, the terms of our senior revolving credit facility and our existing indentures permit us to borrow additional money. If we borrow more money, the risks related to our indebtedness could increase significantly.
 
Debt Service—We may not be able to generate sufficient cash to service our debt, which may require us to refinance our indebtedness or default on our scheduled debt payments.
 
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on a range of economic, competitive and business factors, many of which are outside our control. We cannot assure you that our business will generate sufficient cash flow from operations. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  See Item 7A—“Quantitative and Qualitative Disclosures about Market Risk” and “Liquidity and Other Financing Arrangements.”
 
            Credit and Capital Market Conditions—Adverse conditions in the credit and capital markets may limit or prevent our ability to borrow or raise capital.
 
            While we believe we have facilities in place that should allow us to borrow funds as needed, adverse conditions in the credit and financial markets could prevent us from obtaining financing, if the need arises.  Our ability to invest in our businesses and refinance maturing debt obligations could require access to the credit and capital markets and sufficient bank credit lines to support cash requirements.  If we are unable to access the credit and capital markets, we could experience a material adverse effect on our financial position or results of operations.
 
             Effects of Regulation—Changes in legislation or government regulations or policies could have a material adverse effect on our financial position or results of operations.
 
        Legislation that may be passed by Congress or other legislative bodies or new regulations that may be issued by federal and other administrative agencies could significantly affect the sales, costs and profitability of our business. The chemical and ammunition industries are subject to legislative and regulatory actions, which could have a material adverse effect on our financial position or results of operations.

        Labor Matters—We cannot assure you that we can conclude future labor contracts or any other labor agreements without work stoppages.
 
 Various labor unions represent a majority of our hourly-paid employees for collective bargaining purposes. The following labor contracts are scheduled to expire in 2009 or early 2010:

Location
 
Number of Employees
 
Expiration Date
Tacoma, WA (Chlor Alkali)
 
13
 
December 2009
Henderson, NV (Chlor Alkali)
 
73
 
March 2010
 
While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude future labor contracts or any other labor agreements without work stoppages and cannot assure that any work stoppages will not have a material adverse effect on our business, financial condition, or results of operations.


 
11

 
 

Item 1B.  UNRESOLVED STAFF COMMENTS
 
Not applicable.

Item 2.  PROPERTIES
 
We have manufacturing sites at 13 separate locations in ten states, Canada and Australia. Most manufacturing sites are owned although a number of small sites are leased. We listed the locations at or from which our products and services are manufactured, distributed, or marketed in the tables set forth under the caption “Products and Services.”
 
We lease warehouses, terminals and distribution offices and space for executive and branch sales offices and service departments.
 
Item 3. LEGAL PROCEEDINGS
 
Saltville

We have completed all work in connection with remediation of mercury contamination at the site of our former mercury cell chlor alkali plant in Saltville, VA required to date. In mid-2003, the Trustees for natural resources in the North Fork Holston River, the Main Stem Holston River, and associated floodplains, located in Smyth and Washington Counties in Virginia and in Sullivan and Hawkins Counties in Tennessee notified us of, and invited our participation in, an assessment of alleged injuries to natural resources resulting from the release of mercury. The Trustees also notified us that they have made a preliminary determination that we are potentially liable for natural resource damages in said rivers and floodplains. We have agreed to participate in the assessment.  We and the Trustees have agreed to enter into discussions concerning a resolution of this matter.  In light of the ongoing discussions and inherent uncertainties of the assessment, we cannot at this time determine whether the financial impact, if any, of this matter will be material to our financial position or results of operations. See “Environmental Matters” contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
St. Gabriel, LA Mercury Vapor Emissions Release

Our subsidiary, Pioneer, discovered in October 2004 that the carbon-based system used to remove mercury from the hydrogen gas stream at the St. Gabriel, LA facility was not at that time sufficiently effective, resulting in mercury vapor emissions that were above the permit limits approved by the Louisiana Department of Environmental Quality (LDEQ). Pioneer immediately reduced the plant’s operating rate and, in late November 2004, completed the installation of the necessary equipment and made the other needed changes, and the plant resumed its normal operations. Pioneer’s emissions monitoring since that time confirmed that the air emissions are below the permit limits. In January 2005, the LDEQ issued a violation notice to Pioneer as a result of this mercury vapor emissions release. In December 2005, the LDEQ issued a penalty assessment of $0.4 million with respect to the notice of violation. Pioneer has administratively appealed the penalty assessment.  Given the facts and circumstances, Pioneer requested that the LDEQ reconsider the penalty assessment.

Other

As part of the continuing environmental investigation by federal, state, and local governments of waste disposal sites, we have entered into a number of settlement agreements requiring us to participate in the investigation and cleanup of a number of sites. Under the terms of such settlements and related agreements, we may be required to manage or perform one or more elements of a site cleanup, or to manage the entire remediation activity for a number of parties, and subsequently seek recovery of some or all of such costs from other Potentially Responsible Parties (PRPs). In many cases, we do not know the ultimate costs of our settlement obligations at the time of entering into particular settlement agreements, and our liability accruals for our obligations under those agreements are often subject to significant management judgment on an ongoing basis. Those cost accruals are provided for in accordance with generally accepted accounting principles and our accounting policies set forth in the environmental matters section in Item 7—“Management’s Discussion and Analysis of Financial Condition and 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. While we believe that none of these legal actions will materially adversely affect our financial position, in light of the inherent uncertainties of litigation, we cannot at this time determine whether the financial impact, if any, of these matters will be material to our results of operations.

 
12

 
 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matter to a vote of security holders during the three months ended December 31, 2008.
 
Executive Officers of the Registrant as of February 24, 2009
 
Name and Age
 
Office
 
Served as an Olin Officer Since
Joseph D. Rupp (58)
 
Chairman, President and Chief Executive Officer
 
1996
Stephen C. Curley (57)
 
Vice President and Treasurer
 
2005
John E. Fischer (53)
 
Vice President and Chief Financial Officer
 
2004
G. Bruce Greer, Jr. (48)
 
Vice President, Strategic Planning
 
2005
Richard M. Hammett (62)
 
Vice President and President, Winchester Division
 
2005
Dennis R. McGough (60)
 
Vice President, Human Resources
 
2005
John L. McIntosh (54)
 
Vice President and President, Chlor Alkali Products Division
 
1999
George H. Pain (58)
 
Vice President, General Counsel and Secretary
 
2002
Todd A. Slater (45)
 
Vice President and Controller
 
2005
 
No family relationship exists between any of the above named executive officers or between any of them and any of our directors. Such officers were elected to serve, subject to the By-laws, until their respective successors are chosen.
 
J. E. Fischer, J. D. Rupp, J. L. McIntosh, and G. H. Pain have served as executive officers more than five years.
 
Stephen C. Curley re-joined Olin on August 18, 2003 as Chief Tax Counsel. He was elected Vice President and Treasurer effective January 1, 2005. From 1997-2001, he served as Vice President and Treasurer of Primex Technologies, Inc., a manufacturer and provider of ordnance and aerospace products and services, which was spun off from Olin in 1996.
 
G. Bruce Greer, Jr. joined Olin on May 2, 2005 as Vice President, Strategic Planning. Prior to joining Olin and since 1997, Mr. Greer was employed by Solutia, Inc., an applied chemicals company. From 2003 to April 2005, he served as President of Pharma Services, a Division of Solutia and Chairman of Flexsys, an international rubber chemicals company which was a joint venture partially owned by Solutia and Akzo Nobel. Prior to that, Mr. Greer served as a Vice President of Corporate Development, Technology, and Information Technology for Solutia.
 
Richard M. Hammett was elected Vice President and President, Winchester Division effective January 1, 2005. Prior to that time and since September 2002, he served as President, Winchester Division. From November 1998 until September 2002, he served as Vice President, Marketing and Sales for the Winchester Division.
 
Dennis R. McGough was elected Vice President, Human Resources effective January 1, 2005. Prior to that time and since 1999, he served as Corporate Vice President, Human Resources.
 
Todd A. Slater was elected Vice President and Controller, effective May 27, 2005. From April 2004 until May 2005, he served as Operations Controller. From January 2003 until April 2004, he served as Vice President and Financial Officer for Olin’s former Metals Group. Prior to 2003, Mr. Slater served as Vice President, Chief Financial Officer and Secretary for Chase Industries Inc. (which was merged into Olin on September 27, 2002 and divested as part of the sale of the Metals business in November 2007).

 
13

 
 
PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of January 30, 2009, we had 5,095 record holders of our common stock.
 
Our common stock is traded on the New York Stock Exchange.
 
The high and low sales prices of our common stock during each quarterly period in 2008 and 2007 are listed below. A dividend of $0.20 per common share was paid during each of the four quarters in 2008 and 2007.
 
2008
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
Market price of common stock per New York Stock Exchange composite transactions
                               
High
 
$
21.93
   
$
27.95
   
$
30.39
   
$
19.39
 
Low
   
15.01
     
19.65
     
18.52
     
12.52
 
                                 
2007
                       
Market price of common stock per New York Stock Exchange composite transactions
                       
High
 
$
18.33
   
$
21.20
   
$
22.99
   
$
24.53
 
Low
   
15.97
     
16.45
     
17.45
     
18.51
 
 
Issuer Purchases of Equity Securities
 
Period
 
Total Number of Shares
(or Units) Purchased
   
Average Price
 Paid
 per Share (or Unit)
   
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
   
Maximum Number of
Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
 
October 1-31, 2008
   
     
N/A
     
       
November 1-30, 2008
   
     
N/A
     
       
December 1-31, 2008
   
     
N/A
     
       
Total
                           
154,076
(1)
 
(1)
On April 30, 1998, we announced a share repurchase program approved by our board of directors for the purchase of up to 5 million shares of common stock. Through December 31, 2008, 4,845,924 shares had been repurchased, and 154,076 shares remain available for purchase under that program, which has no termination date.
 
 
14

 

 
 
Performance Graph

This graph compares the total shareholder return on our common stock with the total return on the (i) Standard and Poor’s 1000 Index (the “S&P 1000”), (ii)  the Current Peer Group, (iii) Standard & Poor’s Midcap 400 and (iv) the Former Peer Group.  Our Current Peer Group is comprised of Georgia Gulf Corporation, Occidental Petroleum Corporation, Alliant Techsystems, PPG Industries, Inc., The Dow Chemical Company and Westlake Chemical Corporation, and our Former Peer Group consists of Georgia Gulf Corporation, Brush Engineered Materials Inc., Mueller Industries, Inc., and Wolverine Tube, Inc.

Our board adjusted the Peer Group to better reflect our current lines of business after the sale of our Metals business and the acquisition of Pioneer Companies.  Our board believes that the S&P 1000 and the New Peer Group provide a better and more accurate basis to compare our performance, as the compensation committee uses the materials companies from the S&P 1000 along with our Current Peer Group for certain benchmarks in executive compensation.

Stock Performance Graph
 
Data is for the five-year period from December 31, 2003 through December 31, 2008. The cumulative return includes reinvestment of dividends. Both the Current Peer Group and the Former Peer Group are weighted in accordance with market capitalization (closing stock price multiplied by the number of shares outstanding) as of the beginning of each of the five years covered by the performance graph. We calculated the weighted return for each year by multiplying (a) the percentage that each corporation’s market capitalization represented of the total market capitalization for all corporations in that Peer Group for such year by (b) the total shareholder return for that corporation for such year.

 
15

 
 

Item 6. SELECTED FINANCIAL DATA
 
TEN-YEAR SUMMARY
 
($ and shares in millions, except per share data)
 
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
   
2001
   
2000
   
1999
 
Operations
                                                           
Sales
 
$
1,765
   
$
1,277
   
$
1,040
   
$
955
   
$
766
   
$
703
   
$
604
   
$
653
   
$
669
   
$
622
 
Cost of Goods Sold
   
1,377
     
1,035
     
792
     
682
     
639
     
588
     
551
     
558
     
544
     
574
 
Selling and Administration
   
137
     
129
     
129
     
128
     
90
     
78
     
70
     
74
     
78
     
78
 
Loss on Restructuring of Businesses
   
— 
     
     
     
     
(10
)
   
     
     
(10
)
   
     
 
Other Operating Income
   
1
     
2
     
7
     
9
     
6
     
     
     
     
     
 
Earnings (Loss) of Non-consolidated Affiliates
   
39
     
46
     
45
     
37
     
9
     
6
     
(8
)
   
(9
)
   
     
(13
)
Interest Expense
   
13
     
22
     
20
     
20
     
20
     
20
     
26
     
17
     
16
     
16
 
Interest and Other (Expense) Income
   
(20
)
   
12
     
12
     
20
     
5
     
3
     
4
     
22
     
5
     
3
 
Income (Loss) before Taxes from Continuing Operations
   
258
     
151
     
163
     
191
     
27
     
26
     
(47
)
   
7
     
36
     
(56)
 
Income Tax Provision (Benefit)
   
100
     
50
     
39
     
74
     
8
     
8
     
(4
   
2
     
14
     
(21)
 
Income (Loss) from Continuing Operations
   
158
     
101
     
124
     
117
     
19
     
18
     
(43
)
   
5
     
22
     
(35)
 
Discontinued Operations, Net
   
     
(110
   
26
     
21
     
36
     
(20)
     
12
     
(14
   
59
     
56
 
Cumulative Effect of Accounting Changes, Net
   
— 
     
     
     
(5
)
   
     
(22
)
   
     
     
     
 
Net Income (Loss)
 
$
158
   
$
(9
)
 
$
150
   
$
133
   
$
55
   
$
(24
)
 
$
(31
)
 
$
(9
)
 
$
81
   
$
21
 
Financial Position
                                                                               
Cash and Cash Equivalents and Short-Term Investments
 
$
247
   
$
333
   
$
276
   
$
304
   
$
147
   
$
190
   
$
136
   
$
202
   
$
82
   
$
46
 
Working Capital, excluding Cash and Cash Equivalents and Short-Term Investments
   
24
     
(14
   
223
     
191
     
232
     
168
     
233
     
67
     
159
     
194
 
Property, Plant and Equipment, Net
   
630
     
504
     
251
     
227
     
205
     
202
     
214
     
253
     
281
     
289
 
Total Assets
   
1,742
     
1,731
     
1,642
     
1,802
     
1,621
     
1,448
     
1,426
     
1,221
     
1,125
     
1,065
 
Capitalization:
                                                                               
   Short-Term Debt
   
     
10
     
2
     
1
     
52
     
27
     
2
     
102
     
1
     
1
 
   Long-Term Debt
   
252
     
249
     
252
     
257
     
261
     
314
     
346
     
330
     
228
     
229
 
   Shareholders’ Equity
   
705
     
664
     
543
     
427
     
356
     
176
     
231
     
271
     
329
     
309
 
Total Capitalization
 
$
957
   
$
923
   
$
797
   
$
685
   
$
669
   
$
517
   
$
579
   
$
703
   
$
558
   
$
539
 
Per Share Data
                                                                               
Net Income (Loss)
                                                                               
   Basic:
                                                                               
      Continuing Operations
 
$
2.08
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
 
$
0.10
   
$
0.49
   
$
(0.78
)
      Discontinued Operations, Net
   
     
(1.48
   
0.36
     
0.30
     
0.53
     
(0.34
   
0.24
     
(0.32
   
1.31
     
1.23
 
      Accounting Changes, Net
   
     
     
     
(0.08
)
   
     
(0.38
)
   
     
     
     
 
      Net Income (Loss)
 
$
2.08
   
$
(0.12
 
$
2.06
   
$
1.87
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
 
$
(0.22
)
 
$
1.80
   
$
0.45
 
   Diluted:
                                                                               
      Continuing Operations
 
$
2.07
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
 
$
0.10
   
$
0.49
   
$
(0.78
      Discontinued Operations, Net
   
     
(1.48
   
0.36
     
0.29
     
0.53
     
(0.34
)
   
0.24
     
(0.32
   
1.31
     
1.23
 
      Accounting Changes, Net
   
     
— 
     
     
(0.08
)
   
     
(0.38
)
   
     
     
     
 
      Net Income (Loss)
 
$
2.07
   
$
(0.12
 
$
2.06
   
$
1.86
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
 
$
(0.22
)
 
$
1.80
   
$
0.45
 
   Cash Dividends:
                                                                               
      Common (historical)
   
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.90
 
      Common (continuing operations)
   
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
     
0.80
 
   Market Price of Common Stock:
                                                                               
      High
   
30.39
     
24.53
     
22.65
     
25.35
     
22.99
     
20.53
     
22.60
     
22.75
     
23.19
     
19.88
 
      Low
   
12.52
     
15.97
     
14.22
     
16.65
     
15.20
     
14.97
     
13.85
     
12.05
     
14.19
     
9.50
 
      Year End
   
18.08
     
19.33
     
16.52
     
19.68
     
22.02
     
20.06
     
15.55
     
16.14
     
22.13
     
19.81
 
Other
                                                                               
Capital Expenditures
 
$
180
   
$
76
   
$
62
   
$
63
   
$
38
   
$
33
   
$
24
   
$
29
   
$
44
   
$
39
 
Depreciation
   
68
     
47
     
38
     
36
     
33
     
40
     
51
     
55
     
52
     
50
 
Common Dividends Paid
   
61
     
59
     
58
     
57
     
56
     
47
     
39
     
35
     
36
     
41
 
Purchases of Common Stock
   
     
— 
     
     
     
     
     
3
     
14
     
20
     
11
 
Current Ratio
   
1.6
     
1.8
     
2.2
     
2.3
     
2.1
     
2.1
     
2.4
     
1.8
     
1.9
     
2.0
 
Total Debt to Total Capitalization
   
26.4
%
   
28.1
%
   
31.8
%
   
37.7
%
   
46.8
%
   
65.9
%
   
60.0
%
   
61.5
%
   
41.1
%
   
42.7
%
Effective Tax Rate
   
38.8
%
   
33.1
%
   
24.2
%
   
38.4
%
   
29.6
%
   
30.8
%
   
n/a
     
30.9
%
   
38.1
%
   
37.0
%
Average Common Shares Outstanding - Diluted
   
76.1
     
74.3
     
72.8
     
71.6
     
68.4
     
58.3
     
49.4
     
43.6
     
45.0
     
45.4
 
Shareholders
   
5,100
     
5,300
     
5,700
     
6,100
     
6,400
     
6,800
     
7,200
     
7,500
     
8,000
     
8,600
 
Employees(1)
   
3,600
     
3,600
     
3,100
     
2,900
     
2,800
     
2,700
     
3,000
     
2,700
     
2,900
     
3,200
 
 
Our Selected Financial Data reflects the following businesses as discontinued operations: Metals business in 2007, Olin Aegis in 2004 and the spin off of Arch (our specialty chemicals business) in 1999.  Since August 31, 2007, our Selected Financial Data reflects the Pioneer acquisition.

(1)    Employee data exclude employees who worked at government-owned/contractor-operated facilities.


 
16

 
 


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
BUSINESS BACKGROUND
 
The Metals business was classified as discontinued operations during 2007 and was excluded from the segment results for all periods presented.  As a result, 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 business 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 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.
 
RECENT DEVELOPMENTS AND HIGHLIGHTS
 
2008 Year

In 2008, Chlor Alkali Products had record segment income of $328.3 million, an improvement of 38% compared with the prior year.  This improvement reflects the combination of the full year contributions from the Pioneer acquisition of $72.7 million, including synergies, and improved pricing of $108.4 million.  These were partially offset by the effect from lower chlorine and caustic soda volumes of $46.7 million.  Operating rates in our Chlor Alkali Products business were 82% for 2008 and were negatively impacted during the fourth quarter of 2008 by lower levels of demand from major customer groups, and by hurricane-related outages at our St. Gabriel, LA facility and our SunBelt joint venture during the third quarter of 2008.  In response to the low level of demand during the fourth quarter of 2008, we announced that the St. Gabriel, LA facility, which was shutdown for scheduled maintenance in late November 2008, will not resume operations until the current conversion and expansion project is completed.  The project is expected to be completed in the second quarter of 2009.  The St. Gabriel, LA facility represents approximately 10% of our chlorine and caustic soda capacity.

During the first three quarters of 2008, demand for caustic soda remained strong.  However, caustic soda supply was constrained by the weakness in chlorine demand, which caused operating rates to be reduced.  This created an imbalance between caustic soda supply and demand.  This imbalance, combined with increased freight and energy costs, resulted in record levels of caustic soda pricing.  During the fourth quarter of 2008, caustic soda demand weakened but less than the decline in chlorine demand.  This caused the caustic soda supply and demand imbalance to continue, which continued to support caustic soda prices.

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 bleach operations.  We substantially completed the closure of the Dalhousie facility by June 30, 2008.  We expect to incur cash expenditures of $2.5 million associated with the shutdown, which were previously included in current liabilities on the Pioneer acquisition balance sheet.  We have paid $1.8 million of costs associated with this shutdown as of December 31, 2008.  This action is expected to generate $8 million to $10 million of annual pretax savings.

Winchester segment income was $32.6 million in 2008, which represented record earnings for the Winchester business, an increase of 23% compared with the prior year.  Winchester’s results for 2008 reflected the combination of improved pricing and increased law enforcement volumes which more than offset higher commodity, material and manufacturing costs.

In 2008, other (expense) income included an impairment charge of the full value of a $26.6 million investment in corporate debt securities.  On October 1, 2008, the issuer of these debt securities announced it would cease trading and appoint a receiver as a result of financial market turmoil.  The decline in the market value of the assets supporting these debt securities negatively impacted the liquidity of the issuer.  During the third quarter of 2008, we determined that these debt securities had no fair market value due to the actions taken by the issuer, turmoil in the financial markets, the lack of liquidity of the issuer, and the lack of trading in these debt securities.  We are currently unable to utilize the capital loss resulting from the impairment of these corporate debt securities; therefore, no tax benefit was recognized during 2008 for the impairment loss.  


 
17

 
 

In 2008, the defined benefit pension plan’s investment portfolio declined by approximately 1%.  The decline reflected the weakness in the domestic and international equity markets and increases in interest rate spreads, which reduced the value of certain corporate fixed income investments. The 2008 pension plan’s investment performance reflects the actions taken in 2007 to reduce the defined benefit pension plan’s exposure to equity investments and increase its exposure to fixed income investments.  During the same period, interest rates on corporate bonds, used to determine the defined benefit pension plan’s liability discount rate, fluctuated dramatically during the year but ended comparable with the levels at December 31, 2007, which resulted in no change to the discount rate for 2008.  We recorded an after-tax charge of $99.4 million ($162.7 million pretax) to Shareholders’ Equity as of December 31, 2008 for our pension and other postretirement plans, which reduced the over funded position in our pension plan that existed at December 31, 2007.  This charge reflected the unfavorable performance on pension plan assets and the unchanged discount rate during 2008.  Based on the current funding requirements, we will not be required to make any cash contributions to the domestic defined benefit pension plan at least through 2009.

2007 Year

Discontinued Operations

In 2001, the industry in which the Metals business operates experienced a 25% decline in volumes that created over capacity in the marketplace, which reduced our financial returns in the Metals business.  Volumes did not return to pre-2001 levels.  Since 2001, we had undertaken a number of restructuring and downsizing actions, including multiple plant closures. The benefits of these actions were more than offset by the escalation of both energy and commodity metal prices, specifically copper, zinc, and nickel. As a result, we were unable to realize acceptable returns in the business.  During the second half of 2006 and first half of 2007, we evaluated a number of strategic alternatives for the Metals business, and we made the decision in mid-2007 to engage Goldman, Sachs & Co. to conduct a formal strategic evaluation process, including the alternative of selling the business.  The sale of Metals provides us with the financial flexibility to pursue investments in areas where we can earn the best returns.

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 sale was subject to Hart-Scott-Rodino Antitrust Improvement Act clearance, but not shareholder approval.  The transaction closed on November 19, 2007.  Based on the Metals assets held for sale, we recognized a pretax loss of $160.0 million partially offset by a $21.0 million income tax benefit, resulting in a net loss on disposal of discontinued operations of $139.0 million for 2007.  The loss on disposal of discontinued operations included a pension curtailment charge of $6.9 million, other postretirement benefits curtailment credit of $1.1 million and estimated transaction fees of $24.6 million.   The final loss recognized related to this transaction will be dependent upon the final determination of the value of working capital in the business.  The loss on the disposal, which included transaction costs, reflected a book value of the Metals business of approximately $564 million and a tax basis of approximately $396 million.  The difference between the book and tax values of the business reflected primarily goodwill of $75.8 million and intangibles of $10.4 million.  Based on an estimated working capital adjustment, we anticipated net cash proceeds from the transaction of $380.8 million, which was in addition to the $98.1 million of after-tax cash flow realized from the operation of Metals during 2007.

In April 2008, we and Global entered into binding arbitration regarding the final working capital adjustment.  The arbitration is expected to be concluded in 2009.

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 $1,891.7 million and $2,112.1 million for the period of our ownership in 2007 and 2006, respectively.  The Metals business sales included commodity metal price changes that are primarily a pass-through.  Intersegment sales of $81.4 million and $69.1 million for the period of our ownership in 2007 and 2006, respectively, representing the sale of ammunition cartridge case cups to Winchester from Metals, at prices that approximate market, 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.  The Metals business employed approximately 2,900 hourly and salaried employees.  The results of operations from the Metals business have been presented as discontinued operations for all periods presented.

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.


 
18

 
 

Pioneer Acquisition

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 plants 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 includes direct fees and expenses.  We financed the merger with cash and $110.0 million of borrowings against our accounts receivable securitization facility (Accounts Receivable Facility).  At the date of acquisition, Pioneer had cash and cash equivalents of $126.4 million.  We assumed $120.0 million of Pioneer’s convertible debt which was redeemed in the fourth quarter of 2007 and January 2008.  We paid a conversion premium of $25.8 million on the Pioneer convertible debt.

For 2008 and the last four months of 2007, Pioneer sales were $552.7 million and $183.6 million, respectively, and segment income was $101.9 million and $29.2 million, respectively, which were included in our Chlor Alkali Products segment results.

As a result of acquiring Pioneer, we anticipate realizing $45 million to $50 million of annual cost savings from integrating the Pioneer operations and our operations within two years from the date of the acquisition.  Since August 2007, Chlor Alkali Products segment earnings included approximately $47 million of realized synergies.  The ability to optimize freight costs has been a key synergy realized as part of the Pioneer acquisition.  In 2007 and 2008, we identified and implemented changes in ship-to and ship-from of both operations’ locations that have reduced annual chlorine ton miles shipped by approximately 5%.  The opportunity to rationalize selling and administration costs was also a significant cost savings realized as part of the Pioneer acquisition.   During the first quarter of 2008, the Pioneer corporate office in Houston was closed, the space was subleased, and all of those activities were consolidated into our existing functions and facilities.

Financing

In August 2007, we entered into a $35 million letter of credit facility to assume the various Pioneer letters of credit issued principally to support the acquisition of materials for the St. Gabriel, LA facility conversion and expansion project.

On October 29, 2007, we entered into a new five-year senior revolving credit facility of $220 million, which replaced the $160 million senior revolving credit facility.  During the first quarter of 2008, we increased our senior revolving credit facility by $20 million to $240 million by adding a new lending institution.  The new senior revolving credit facility will expire in October 2012.  We have the option to expand the $240 million senior revolving credit facility by an additional $60 million through adding a maximum of two additional lending institutions each year.  Borrowing options and restrictive covenants are similar to those of our previous $160 million senior revolving credit facility.  The $240 million senior revolving credit facility includes a $110 million letter of credit subfacility which is in addition to the $35 million letter of credit facility.

On June 26, 2007, we entered into the $100 million 364-day revolving credit facility ($100 million Credit Facility) and the $150 million 364-day revolving credit facility ($150 million Credit Facility).  According to their terms, the $100 million Credit Facility matured on the earlier of June 24, 2008 or upon an increase in the lending commitments under our existing senior revolving credit facility and the establishment of an accounts receivable securitization facility, and the $150 million Credit Facility would have matured on June 24, 2008.  In the fourth quarter of 2007, the $100 million Credit Facility expired as all conditions for early termination were met and the $150 million Credit Facility was terminated as we no longer needed the credit commitment.

On July 25, 2007, we established a $250 million, 364-day Accounts Receivable Facility, renewable annually for five years, which expires in July 2012.  As a result of the sale of Metals, the Accounts Receivable Facility was reduced from $250 million to $100 million.  In July 2008, the Accounts Receivable Facility was reduced from $100 million to $75 million.  The $75 million Accounts Receivable Facility provides for the sale of our eligible trade receivables to third party conduits through a wholly-owned, bankruptcy-remote, special purpose entity that is consolidated for financial statement purposes.

2006 Year
 
In April 2006, we reached an agreement in principle and expected a settlement with the Internal Revenue Service (IRS) on certain outstanding federal tax exposures. On July 10, 2006, the settlement was finalized. This settlement, which included the periods 1996 to 2002, related primarily to the tax treatment of capital losses generated in 1997. We made payments of $46.7 million, $0.6 million, and $1.5 million in 2006, 2007 and 2008, respectively, to the IRS and various state and local jurisdictions, which was less than the amount previously reserved.  As a result, income tax expense in 2006 was reduced by $21.6 million associated with the settlement and other tax matters.
 

 
19

 
 

On June 26, 2006, we commenced an offer to exchange a new series of notes due in 2016 and cash for up to $125.0 million of the $200.0 million 9.125% senior notes due in 2011 (2011 Notes). On July 11, 2006, we announced that approximately $160.0 million aggregate principal amount of the 2011 Notes had been validly tendered for exchange. Since more than $125.0 million of the 2011 Notes had been tendered, the new notes were issued on a pro rata basis in accordance with the terms of the exchange offer. On July 28, 2006, we issued $125.0 million of 6.75% senior notes due in 2016 (2016 Notes) and paid a premium of $18.8 million to the existing note holders in exchange for $125.0 million of 2011 Notes. We expensed $1.2 million of third party fees associated with the exchange.
 
During the fourth quarter of 2006, we recorded a $6.0 million insurance recovery for Hurricane Katrina business interruption experienced in our Chlor Alkali Products operations in 2005 and early 2006.

CHLOR ALKALI PRODUCTS PRICING

In accordance with industry practice, we compare ECU prices on a netback basis, reporting and analyzing prices net of the cost of transporting the products to customers to allow for a comparable means of price comparisons between periods and with respect to our competitors.  For purposes of determining our ECU netback, we use prices that we realize as a result of sales of chlorine and caustic soda to our customers, and we do not include the value of chlorine and caustic soda that is incorporated in other products that we manufacture and sell.

Quarterly and annual average ECU netbacks, excluding SunBelt, for 2008, 2007, and 2006 were as follows, which includes Pioneer ECU netbacks subsequent to August 31, 2007:

   
2008
   
2007
   
2006
 
First Quarter
 
$
580
   
$
500
   
$
590
 
Second Quarter
   
590
     
510
     
560
 
Third Quarter
   
660
     
550
     
540
 
Fourth Quarter
   
740
     
555
     
520
 
Annual Average
   
635
     
535
     
550
 

Beginning in late 2006, driven by reduced levels of chlorine demand and a series of planned and unplanned plant maintenance outages, chlor alkali plant operating rates for the industry were reduced.  While this allowed chlorine supply to stay balanced, it caused caustic soda demand, which did not experience a decline, to exceed supply.  This led to industry-wide caustic soda price increases.  During the first three quarters of 2008, North American demand for caustic soda remained strong.  However, caustic soda supply continued to be constrained by the weakness in chlorine demand, which caused operating rates to be reduced.  This resulted in a significant supply and demand imbalance for caustic soda in North America.  This imbalance, combined with increased freight and energy costs, resulted in our achieving record levels of caustic soda pricing.  During the fourth quarter of 2008, North American caustic soda demand weakened but less than the decline in chlorine demand.  This caused the caustic soda supply and demand imbalance to continue, which continued to support record levels of caustic soda prices. While we have seen sequential improvements in caustic soda pricing beginning with the fourth quarter of 2006, we have continued to experience weaker chlorine prices.  Chlorine prices have declined quarterly since the third quarter of 2007.
 
PENSION AND POSTRETIREMENT BENEFITS
 
In October 2007, we announced that we would freeze 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 December 31, 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 Contributing Employee Ownership Plan (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.  Freezing the defined benefit pension plan for salaried and certain non-bargaining hourly employees was accounted for as a curtailment under SFAS No. 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plan and for Termination Benefits” (SFAS No. 88).  As a result of freezing the defined benefit plan, we recorded a curtailment charge of $1.9 million for the defined benefit pension plan and a corresponding curtailment credit of $1.9 million for the non-qualified pension plan in 2007.


 
20

 
 

We account for our defined benefit pension plans using actuarial models required by SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS No. 87).  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 liability 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 years; compared to the average remaining service lives of the active employees in the defined benefit pension plan of 10.7 years.  At December 31, 2008, the average remaining life expectancy of the inactive participants in the defined benefit pension plan was 19 years.

During the third quarter of 2006, the “Pension Protection Act of 2006”, amended by “The Worker, Retiree, and Employer Recovery Act,” during the fourth quarter of 2008, became law. Among the stated objectives of the laws are the protection of both pension beneficiaries and the financial health of the PBGC. To accomplish these objectives, the new laws require sponsors to fund defined benefit pension plans earlier than previous requirements and to pay increased PBGC premiums. The laws require defined benefit plans to be fully funded in 2011.   In September 2006, we made a voluntary pension plan contribution of $80.0 million and in May 2007, we made an additional $100.0 million voluntary contribution to our defined benefit pension plan.  During 2007, the asset allocation in the plan was adjusted to insulate the plan from discount rate risk and reduce the plan’s exposure to equity investments.  Based on the combination of these actions and favorable asset performance in 2006 and 2007, offset by the unfavorable performance on plan assets in 2008, we will not be required to make any cash contributions to the domestic defined benefit pension plan at least through 2009.  At December 31, 2008, the projected benefit obligation of our defined pension plan of $1,644.0 million exceeded the market value of assets in our defined pension plan by $1.7 million.

Under SFAS No. 158, we recorded an after-tax charge of $99.4 million ($162.7 million pretax) to Shareholders’ Equity as of December 31, 2008 for our pension and other postretirement plans.  This charge reflected the unfavorable performance on plan assets during 2008.  In 2007, we recorded a $138.3 million after-tax credit ($226.6 million pretax) to Shareholders’ Equity as of December 31, 2007 for our pension and other postretirement plans.  This credit reflected a 25-basis point increase in the plans’ discount rate, combined with an increase in the value of the plan assets from favorable plan performance and the $100.0 million contribution.   In 2006, we recorded an after-tax credit of $54.5 million ($89.2 million pretax) to Shareholders’ Equity as a result of a decrease in the accumulated pension benefit obligation, which resulted primarily from a 25-basis point increase in the plan discount rate, combined with an increase in the value of the plan assets from favorable plan performance and the $80.0 million contribution. In 2006, we adopted SFAS No. 158, which required us to record a net liability or asset to report the funded status of our defined benefit pension and other postretirement plans on our balance sheet. As a result, we recorded after-tax charges to Shareholders’ Equity of $39.7 million and $33.6 million for the pension and other postretirement plans, respectively, ($65.0 million and $55.0 million pretax, respectively). The non-cash credits or charges to Shareholders’ Equity do not affect our ability to borrow under our revolving credit agreement.

Components of net periodic benefit (income) costs were:

   
2008
   
2007
   
2006
 
   
($ in millions)
 
Pension Benefits
 
$
(7.6
)
 
$
33.5
   
$
44.1
 
Other Postretirement Benefits
 
 
8.4
   
 
10.8
   
 
11.5
 

In 2008, we recorded curtailment charges of $4.1 million associated with the transition of a portion of our East Alton, IL Winchester hourly workforce and our McIntosh, AL Chlor Alkali hourly workforce from a defined benefit pension plan to a defined contribution pension plan.  In 2007, we recorded a defined benefit pension curtailment charge of $6.9 million and other postretirement benefits curtailment credit of $1.1 million related to the sale of the Metals business, which were included in the loss on disposal of discontinued operations.  Also during 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.  This curtailment charge was included in income from discontinued operations.  In 2006, we recorded pension curtailment charges of $2.4 million and $3.0 million resulting from a portion of the Winchester and Metals hourly workforces, respectively, who voluntarily elected to transition from a defined benefit pension plan to a defined contribution pension plan.  The Metals portion of this curtailment charge was included in income from discontinued operations.


 
21

 
 

After giving effect to the changes in curtailment charges and credits, the decrease in 2008 net periodic pension expense from 2007 was due to the favorable impact of the $100 million voluntary contribution made in May 2007, the favorable 2007 investment returns, a 25-basis point increase in the liability discount rate in 2007, the impact of the plan freeze for salaried and non-bargained hourly employees that became effective January 1, 2008, and an increase in the amortization period for actuarial losses.  After giving effect to the changes in curtailment charges and credits, the decrease in 2007 net periodic pension expense from 2006 was due to the combination of a 25-basis point increase in discount rate for 2007, the voluntary contributions to our defined benefit pension plan of $100.0 million in May 2007 and $80.0 million in September 2006, and the favorable performance on plan assets in 2006.

The service cost and the amortization of prior service cost components of pension expense related to employees of the operating segments are 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 $7.9 million and $10.6 million for the period of our ownership in 2007 and 2006, respectively, was included in income from discontinued operations.  The portion of other postretirement benefit costs for the Metals business employees of $4.4 million and $4.7 million for the period of our ownership in 2007 and 2006, respectively, was also included in income from discontinued operations.

CONSOLIDATED RESULTS OF OPERATIONS

   
2008
   
2007
   
2006
 
   
($ in millions, except per share data)
 
Sales
 
$
1,764.5
   
$
1,276.8
   
$
1,039.7
 
Cost of Goods Sold
   
1,377.2
     
1,035.5
     
792.2
 
Gross Margin
   
387.3
     
241.3
     
247.5
 
Selling and Administration
   
137.3
     
129.2
     
128.7
 
Other Operating Income
   
1.2
     
1.9
     
6.7
 
Operating Income
   
251.2
     
114.0
     
125.5
 
Earnings of Non-consolidated Affiliates
   
39.4
     
46.0
     
45.3
 
Interest Expense
   
13.3
     
22.1
     
20.3
 
Interest Income
   
6.2
     
11.6
     
11.6
 
Other (Expense) Income
   
(26.0
)
   
1.2
     
1.1
 
Income from Continuing Operations before Taxes
   
257.5
     
150.7
     
163.2
 
Income Tax Provision
   
99.8
     
49.9
     
39.5
 
Income from Continuing Operations
   
157.7
     
100.8
     
123.7
 
Discontinued Operations:
                       
Income from Discontinued Operations, Net
   
     
29.0
     
26.0
 
Loss on Disposal of Discontinued Operations, Net
   
     
(139.0
)
   
 
Net Income (Loss)
 
$
157.7
   
$
(9.2
)
 
$
149.7
 
Basic Income (Loss) per Common Share:
                       
Income from Continuing Operations
 
$
2.08
   
$
1.36
   
$
1.70
 
Income from Discontinued Operations, Net
   
     
0.39
     
0.36
 
Loss on Disposal of Discontinued Operations, Net
   
     
(1.87
)
   
 
Net Income (Loss)
 
$
2.08
   
$
(0.12
)
 
$
2.06
 
Diluted Income (Loss) per Common Share:
                       
Income from Continuing Operations
 
$
2.07
   
$
1.36
   
$
1.70
 
Income from Discontinued Operations, Net
   
     
0.39
     
0.36
 
Loss on Disposal of Discontinued Operations, Net
   
     
(1.87
)
   
 
Net Income (Loss)
 
$
2.07
   
$
(0.12
)
 
$
2.06
 
 
2008 Compared to 2007

For 2008, total company sales were $1,764.5 million compared with $1,276.8 million last year, an increase of $487.7 million, or 38%.  Chlor Alkali Products sales increased by $430.3 million, or 51%, primarily due to the inclusion of a full year of Pioneer sales in 2008 compared with four months in 2007 and higher ECU prices.  The acquisition of Pioneer contributed to an increase in 2008 sales of $369.1 million compared to 2007.  Winchester sales increased by $57.4 million, or 13%, from 2007 primarily due to increased selling prices and improved law enforcement volumes.

Gross margin increased $146.0 million, or 61%, from 2007, as a result of improved Chlor Alkali Products gross margin, primarily due to the contribution from Pioneer, and improved Winchester gross margin from higher selling prices.  Gross margin was also positively impacted by decreased environmental costs in 2008 of $10.2 million primarily associated with a charge in the prior year related to costs at a former waste disposal site based on revised remediation estimates resulting from negotiations with a government agency and the reduction in defined benefit pension expense of $13.7 million, which was partially offset by an increase in defined contribution pension expense of $7.6 million.  Gross margin as a percentage of sales increased to 22% in 2008 from 19% in 2007.

 
22

 
 


Selling and administration expenses as a percentage of sales were 8% in 2008 and 10% in 2007.  Selling and administration expenses in 2008 were $8.1 million higher than 2007 primarily due to expenses associated with the acquired Pioneer operations, net of synergies, ($10.5 million), a higher provision for doubtful customer accounts receivable ($3.0 million) increased stock-based compensation expense ($2.3 million), primarily resulting from mark-to-market adjustments, higher consulting costs ($1.3 million) and increased salary and benefit costs ($1.4 million).  These increases were partially offset by decreased defined benefit pension expense ($12.1 million), offset by increased defined contribution pension expense ($1.0 million).

Other operating income for 2008 included $1.0 million for a portion of a 2007 gain realized on an intangible asset sale in Chlor Alkali Products, which is recognized ratably through 2012, $0.9 million for a portion of a gain realized on the sale of equipment, which is recognized ratably through June 2009, and $0.2 million of a gain on the disposition of land associated with a former manufacturing facility.  These gains were partially offset by a loss of $0.9 million on the disposition of property, plant and equipment.  Other operating income for 2007 included the receipt of a $1.3 million contingent payment associated with a 1995 divestiture and $0.6 million for a portion of a 2007 gain realized on an intangible asset sale in Chlor Alkali Products.

The earnings of non-consolidated affiliates were $39.4 million for 2008, a decrease of $6.6 million from 2007.  Lower volumes at SunBelt, due to the impact of hurricane-related outages and other force majeure events at one of its chlorine customers, were partially offset by higher ECU prices.

Interest expense decreased by $8.8 million, or 40%, in 2008, primarily due to a lower level of outstanding debt and capitalization of $5.0 million of interest in 2008 associated with our St. Gabriel, LA facility conversion and expansion project and a major maintenance capital project at our McIntosh, AL facility.

Interest income decreased by $5.4 million, or 47%, in 2008 primarily due to lower short-term interest rates.

Other (expense) income for 2008 included an impairment charge of the full value of a $26.6 million investment in corporate debt securities.

The effective tax rate for continuing operations for 2008 included expense of $10.4 million for a valuation allowance required against the deferred tax benefit generated from the impairment of corporate debt securities.  As we are currently unable to utilize the capital loss resulting from the impairment of the $26.6 million of corporate debt securities, no tax benefit was recognized during 2008 for the impairment loss.  Additionally, the effective tax rate for continuing operations for 2008 included a $2.1 million reduction in expense primarily associated with the finalization of the 2007 income tax returns which resulted in an increased benefit for the domestic manufacturing deduction.  The effective tax rate for continuing operations for 2008 of 35.5%, which was increased by the effect of these two items of $8.3 million, was higher than the 35% U.S. federal statutory rate primarily due to state income taxes, which were offset in part by the benefit of the domestic manufacturing deduction and the utilization of certain state tax credits.   The effective tax rate for continuing operations for 2007 of 33.1% was lower than the 35% U.S. federal statutory rate primarily due to the benefit of the domestic manufacturing deduction and the utilization of certain state tax credits, offset in part by state income taxes and income in certain foreign jurisdictions being taxed at higher rates.

2007 Compared to 2006

For 2007, total company sales were $1,276.8 million compared with $1,039.7 million last year, an increase of $237.1 million, or 23%. Chlor Alkali Products sales increased by $179.0 million, or 27%, primarily due to the inclusion of Pioneer sales for four months in 2007, totaling $183.6 million offset by lower ECU prices and slightly lower shipment volumes from the prior year from our Chlor Alkali operations, excluding Pioneer. Winchester sales increased by $58.1 million, or 16%, from 2006 primarily due to increased selling prices and stronger volumes.

Gross margin decreased $6.2 million, or 3%, from 2006, primarily as a result of higher environmental costs of $15.3 million primarily associated with an increase in costs at a former waste disposal site based on revised remediation estimates resulting from negotiations with a government agency.  Chlor Alkali Products gross margins declined slightly as the favorable results from the acquisition of Pioneer were offset by lower ECU pricing and slightly lower shipment volumes.  This increase in environmental costs and lower Chlor Alkali margins were partially offset by lower pension costs and improved Winchester gross margins from higher selling prices and improved volumes.  Gross margin as a percentage of sales decreased to 19% in 2007 from 24% in 2006. This margin percentage decrease reflects higher environmental costs and lower chlor alkali margins offset in part by the higher Winchester selling prices and lower pension costs.

 
23

 
 

Selling and administration expenses as a percentage of sales were 10% in 2007 and 12% in 2006.  Selling and administration expenses in 2007 were $0.5 million higher than 2006 primarily due to expenses associated with the acquired Pioneer operations ($9.9 million), higher management incentive compensation costs partially resulting from mark-to-market adjustments on stock-based compensation ($3.2 million) and increased salary and benefit costs ($1.7 million).  These increases were mostly offset by a lower level of legal and legal-related settlement expenses ($7.5 million), decreased pension and postretirement expenses ($5.1 million), and lower consulting fees ($1.6 million).

Other operating income for 2007 included the receipt of a $1.3 million contingent payment associated with a 1995 divestiture and $0.6 million for a portion of a 2007 gain realized on an intangible asset sale in Chlor Alkali Products, which is recognized ratably through 2012.  Other operating income for 2006 included a $6.0 million insurance recovery for Hurricane Katrina business interruption experienced in 2005 and in early 2006 in our Chlor Alkali Products operations and a gain of $0.7 million on the disposition of a former manufacturing plant.

The earnings of non-consolidated affiliates were $46.0 million for 2007, an increase of $0.7 million from 2006, primarily due to slightly improved shipment volumes, decreased manufacturing costs, and lower depreciation expense at SunBelt, which was substantially offset by lower ECU prices at SunBelt.

Interest expense increased by $1.8 million, or 9%, in 2007, due to a higher level of outstanding debt.

Interest income for 2007 was flat with 2006 as higher short-term interest rates were offset by lower average cash and short-term investment balances.

The effective tax rate for continuing operations for 2007 of 33.1% was lower than the 35% U.S. federal statutory rate primarily due to the benefit of the domestic manufacturing deduction contained in the Jobs Creation Act of 2004, which increased from 3% to 6% in 2007, and the utilization of certain state tax credits, which were offset in part by state income taxes and income in certain foreign jurisdictions being taxed at higher rates.  The effective tax rate for continuing operations for 2006 included a $21.6 million reduction in income tax expense associated with the settlement of certain audit issues related to the audits for the years 1996 to 2002, principally the tax treatment of capital losses generated in 1997 and other tax matters.  The effective tax rate for continuing operations for 2006 of 37.4%, which was reduced by this tax settlement, was higher than the 35% U.S. federal statutory rate primarily due to state income taxes and income in certain foreign jurisdictions being taxed at higher rates offset in part by the domestic manufacturing deduction and utilization of certain state tax credits.

Income from discontinued operations, net for 2007 was $29.0 million compared with $26.0 million for 2006, an increase of $3.0 million. Income from discontinued operations before income taxes for 2007 was $7.2 million higher than 2006.  The Metals pretax income for 2007 included a last-in, first-out (LIFO) inventory liquidation gain of $15.4 million as part of a Metals inventory reduction program initiated in 2007.  The Metals pretax income for 2006 included a LIFO inventory liquidation gain of $25.9 million related to the closure of two of our former Metals facilities, partially offset by restructuring charges of $17.6 million related to the closure of these Metals facilities.  The Metals improved results also reflect higher selling prices and lower costs resulting from the 2006 restructuring and plant shutdown actions.  These factors more than offset the negative impact of lower sales volumes and higher energy and metal melting loss costs.  The effective tax rates were 36.1% for 2007 compared with 31.9% last year.  The 31.9% effective tax rate was lower than 2007 due to the timing of income from certain foreign jurisdictions being taxed at lower rates.

Loss on disposal of discontinued operations, net for 2007 was $139.0 million.  We recognized a pretax loss of $160.0 million offset by a $21.0 million income tax benefit.

 
24

 
 

SEGMENT RESULTS
 
We define segment results as income (loss) from continuing operations before interest expense, interest income, other (expense) income, and income taxes and include the results of non-consolidated affiliates. Consistent with the guidance in SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” (SFAS No. 131), we have determined it is appropriate to include the operating results of non-consolidated affiliates in the relevant segment financial results. Our management considers SunBelt to be an integral component of the Chlor Alkali Products segment. They are engaged in the same business activity as the segment, including joint or overlapping marketing, management, and manufacturing functions.
 
   
2008