final10k2010.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, 2010

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. x

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, 2010, the aggregate market value of registrant’s common stock, par value $1 per share, held by non-affiliates of registrant was approximately $1,426,484,996 based on the closing sale price as reported on the New York Stock Exchange.

As of January 31, 2011, 79,583,516 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 Annual Meeting of Shareholders
to be held in 2011
 
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 65% of 2010 sales.  Winchester products, which represent 35% of 2010 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.”

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.

In May 2010, 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.



 
 
 
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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, caustic soda and hydrogen 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 2010 of 1.98 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.

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 12% 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 in North America 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 and removed.  Because chlorine and caustic soda 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 $475, $520 and $635 per ECU in 2010, 2009 and 2008, respectively.


 
 
 
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During the first three quarters of 2008, North American demand for caustic soda was 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.  The result was a record ECU netback, in our system, in the first quarter of 2009.

Our 2009 ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting the changes in the pricing dynamics in North America.  Beginning late in the fourth quarter of 2008 and continuing through 2009, demand for caustic soda weakened significantly, and fell below the demand for chlorine.  This created excess supply in North America, which caused caustic soda prices to fall.  The over supply of caustic soda caused industry operating rates to be constrained, which resulted in chlorine price increase announcements of $300 per ton during the second quarter of 2009.  Caustic soda prices declined precipitously in the second quarter of 2009 and these declines continued into the third quarter of 2009.  During the third quarter of 2009, chlorine and caustic soda demand became more balanced eliminating the oversupply of caustic soda.  We began realizing increases in chlorine prices in the third quarter of 2009 with most of the improvement in the fourth quarter of 2009.  ECU netbacks, in our system, bottomed out in the third quarter of 2009.  During the fourth quarter of 2009, as caustic soda demand improved, chlorine production declined due to seasonally weaker demand.  This resulted in a supply and demand imbalance for caustic soda in North America.  As a result of this imbalance, in December 2009, a $75 per ton caustic soda price increase was announced.  We began realizing the benefits of this price increase in caustic soda in the first half of 2010.

    Our 2010 ECU netbacks of $475 were 9% lower than the 2009 netbacks of $520; however, the pricing trend has been positive throughout 2010 as ECU netbacks increased sequentially from the low level of $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year by at least 10%, peaking in the third quarter of 2010 with a 91% operating rate during the summer demand season.  A significant portion of the North American chlor alkali demand improvement came from exports of products made from chlorine, driven by the energy advantage North America enjoys by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout the year.  During February 2010, an $80 per ton caustic soda price increase was announced.  We began realizing a portion of this price increase in caustic soda in the second quarter of 2010.  Caustic soda demand continued to improve, and as a result, during the third quarter of 2010, three additional caustic soda price increases were announced totaling $135 per ton.  We believe that a portion of the $135 per ton caustic soda price increases announced during the third quarter of 2010 will be realized.  We anticipate some additional benefits from these price increases and from contracts that re-set on an annual basis to be realized in the first half of 2011.  Additionally, we announced a $40 per ton caustic soda price increase in January 2011.  While the success of this $40 per ton caustic soda price increase is not yet known, some portion of the benefits of this price increase, if realized, would impact our system beginning in the second quarter of 2011.

Electricity and salt are the major purchased raw materials for our Chlor Alkali Products segment.  Raw materials represent approximately 49% of the total cost of producing an ECU.  Electricity is the single largest raw material component in the production of chlor alkali products.  We are supplied by utilities that primarily utilize coal, hydroelectric, natural gas, and nuclear power.  The commodity nature of this industry places an 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.  During the fourth quarter of 2009, we completed a conversion and expansion project at our St. Gabriel, LA facility and initiated production.  This project increased capacity at this location from 197,000 ECUs to 246,000 ECUs and significantly reduced the site’s manufacturing costs.  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, would allow us to expand capacity cost-effectively at these locations.  In December 2010, we announced a plan to convert our Charleston, TN facility to 200,000 tons of membrane capacity capable of producing both potassium hydroxide and caustic soda.  The conversion of the Charleston, TN plant to membrane technology will reduce the electricity usage per ECU produced by approximately 25% and the configuration of the new plant will result in an increase in our capacity to produce potassium hydroxide.  In addition, we announced our intention to reconfigure our Augusta, GA facility to manufacture bleach and distribute caustic soda, while discontinuing chlor alkali manufacturing at this site.  When complete, this plan will reduce our overall chlor alkali production capacity by 160,000 ECU’s or 8% of our demonstrated capacity.


 
 
 
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We also manufacture and sell other chlor alkali-related products.  These products include chemically processed salt, hydrochloric acid, sodium hypochlorite (bleach), hydrogen, sodium hydrosulfite, and potassium hydroxide.  We have recently invested in capacity and product upgrades in bleach and hydrochloric acid.  In the fourth quarter of 2009, we initiated bleach manufacturing and shipping by railroad expansion projects at three of our chlor alkali facilities.  During 2010, we initiated a $17 million to $20 million capital project to construct a low salt, high strength bleach facility located at our McIntosh, AL chlor alkali site.  This low salt, high strength bleach facility will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.

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
 
 
 
 
5

 
 


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 soda to higher value-added applications.  We also have the opportunity, when business conditions permit, to pursue incremental chlorine and caustic soda expansions through our SunBelt and St. Gabriel, LA facilities.

Winchester

Products and Services

In 2010, Winchester was in its 144th year of operation and its 80th 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 and, in 2009, we received a Department of Homeland Security (DHS) contract for pistol ammunition.  Additionally, during 2010 we were awarded five-year contracts from both the U.S. Secret Service (pistol ammunition and shotshells) and the FBI (rifle 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.  In support of our continuous improvement initiatives, our manufacturing facilities in East Alton, IL, achieved ISO recertification to the ISO 9001:2008 standard in December 2009.  Additionally our facility in Australia was upgraded to the ISO 9001:2008 standard in February 2009 and our manufacturing facility in Oxford, MS achieved ISO 9001:2008 recertification in January 2010.

Winchester has strong relationships throughout the sales and distribution chain and strong ties to traditional dealers and distributors.  Winchester has also built its business with key high volume mass merchants and specialty sporting goods retailers.  We have consistently developed industry-leading ammunition.  In 2009, Winchester was named “Ammunition Manufacturer of the Year” for the second consecutive year by the National Association of Sporting Goods Wholesalers and Winchester wholesaler, Big Rock Sports, recognized Winchester as its 2009 “Hunting/Shooting Vendor of the Year.”  In addition, the carton for Winchester’s 2008 Theodore Roosevelt Commemorative Ammunition was honored with a “2009 Excellence Award” from the Paperboard Packaging Council, the International Hunter Education Association (IHEA) presented Winchester with the “Gladney Davidson Memorial Award,” its most prestigious honor, and Winchester’s new web-based ballistics calculator received the 2009 SHOT Show “Editor’s Choice” award from Shooting Sports Retailer magazine.  In 2010, the Winchester® Supreme Elite™ Bonded PDX1™ product line received the National Rifle Association’s “Golden Bullseye Award” in the ammunition category from its Shooting Illustrated magazine while Winchester’s Ballistic Silvertip® Lead-Free varmint loads received both a 2010 “Best of the Best” award in the ammunition category from Field & Stream magazine and a 2010 “Best New Load for 2010” award from Outdoor Life magazine.  Outdoor Life additionally named Winchester’s Supreme Elite™ Dual Bond™ .44 Magnum big-bore handgun hunting cartridge a “Best New Load for 2010.”  Winchester was also honored with the “Cabela Lifetime Business Achievement Award” from the U.S. Sportsmen’s Alliance (USSA) during 2010.

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.



 
 
 
6

 
 
    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

On November 3, 2010, we announced that we had made the decision to relocate Winchester centerfire ammunition operations from East Alton, IL to Oxford, MS.  This relocation, when completed, is forecast to reduce Winchester’s annual operating costs by approximately $30 million.  We currently expect to complete this relocation by the end of 2015.  Once completed, Winchester expects to have the most modern centerfire ammunition production facility in North America.

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.

INTERNATIONAL OPERATIONS

Our subsidiary, Olin Canada ULC, formerly PCI Chemicals Canada Company/Société PCI Chimie Canada, operates one chlor alkali facility in Becancour, Quebec, 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 2010, 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 5% of sales in 2010.  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, mass merchants, retailers, wholesalers, other distributors, and the U.S. Government and its prime contractors.
 
 
 
 
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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 $178.1 million and $231.2 million as of January 31, 2011 and 2010, respectively.  The backlog orders are in our Winchester business.  Backlog is comprised of all open customer orders not yet shipped.  Approximately 66% of contracted backlog as of January 31, 2011 is expected to be filled during 2011.

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 million tons of chlorine and 16 million tons of caustic soda capacity, account for approximately 18% 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, 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.  As a result, we supply a greater share of the merchant chlorine market than our share of overall industry capacity.  We do utilize chlorine to manufacture industrial bleach and hydrochloric acid.  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 merchant 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 independent market research sponsored by the Sporting Arms and Ammunition Manufacturers’ Institute (SAAMI) and the National Shooting Sports Foundation.  Founded in 1926, SAAMI is an association of the nation’s leading manufacturers of sporting firearms, ammunition and components.  According to SAAMI, 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, 2010, we had approximately 3,700 employees, with 3,500 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 2011 or early 2012:

Location
 
Number of Employees
 
Expiration Date
East Alton (Winchester)
 
1,470
 
December 2011
McIntosh (Chlor Alkali)
 
210
 
April 2012
Becancour (Chlor Alkali)
 
128
 
April 2012

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 $2.1 million in 2010, $2.2 million in 2009 and $2.0 million in 2008.

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 set forth 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.


 
 
 
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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 operating results 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.

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 North America.  Our customers sell their products abroad.  As a result, our business is affected by general economic conditions and other factors in Western Europe, South America and most of East Asia, particularly China and Japan, including fluctuations in interest rates, customer demand, labor and energy 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 North America 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, South American, 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.


 
 
 
10

 
 


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 soda.

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 result 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.  There have been capacity additions of approximately 1,950,000 tons announced by Formosa Plastics Corporation, Shintech, Inc., Westlake Chemical Corporation, a Dow/Mitsui & Co. Ltd. joint venture, and K2 Pure Solutions.  These announced capacity expansions are forecast by CMAI to come on line ratably over the next four years.  In 2010, we announced plans to convert our Charleston, TN facility to 200,000 tons of membrane capacity and our intention to reconfigure our Augusta, GA facility to discontinue chlor alkali manufacturing.  These actions will reduce overall chlor alkali production capacity by 160,000 ECU’s.  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 natural gas prices, could make them less competitive in world markets.  Continued expansion offshore, particularly in Asia, will continue to have an impact on the ECU values as imported caustic soda replaces some capacity in North America.

Price in the chlor alkali industry is the 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 decreases 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.

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 large quantities of 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.


 
 
 
11

 
 


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 resource 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.”

Litigation and ClaimsWe 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 TransportationNew 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 could implement 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 if an incident were to occur 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.
 

 
 
 
12

 
 


Labor MattersWe 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 2011 or early 2012:
 
Location
 
Number of Employees
 
Expiration Date
East Alton (Winchester)
 
1,470
 
December 2011
McIntosh (Chlor Alkali)
 
210
 
April 2012
Becancour (Chlor Alkali)
 
128
 
April 2012

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.
 
Effects of Regulation—Changes in legislation or government regulations or policies, including tax 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.
 
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.

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.

Credit Facilities—Weak industry conditions could affect our ability to comply with the financial maintenance covenants in our senior revolving credit facility and certain tax-exempt bonds.

Our senior revolving credit facility includes certain financial maintenance covenants requiring us to not exceed a maximum leverage ratio and to maintain a minimum coverage ratio.  During the fourth quarter of 2010, $153.0 million of Gulf Opportunity Zone Act of 2005 (Go Zone) and American Recovery and Reinvestment Act of 2009 (Recovery Zone) tax-exempt bonds sponsored by Alabama, Mississippi and Tennessee were issued with final maturities of between 2024 and 2035.  The financial covenants in the credit agreements associated with the Go Zone and Recovery Zone bonds mirror those in our senior revolving credit facility.

 
 
 
13

 
 

Depending on the magnitude and duration of chlor alkali cyclical downturns, including deterioration in prices and volumes, there can be no assurance that we will continue to be in compliance with these ratios.  If we failed to comply with either of these covenants in a future period and were not able to obtain waivers from the lenders thereunder, we would need to refinance our current senior revolving credit facility and the Go Zone and Recovery Zone bonds.  However, there can be no assurance that such refinancing would be available to us on terms that would be acceptable to us or at all.
 
Pension Plans—The impact of declines in global equity and fixed income 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.
 
Under Accounting Standard Codification (ASC) 715 “Compensation–Retirement Benefits” (ASC 715), formerly 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 $26.0 million ($42.3 million pretax) to shareholders’ equity as of December 31, 2010 for our pension and other postretirement plans.  This charge reflected a 45-basis point decrease in the plans’ discount rate, partially offset by the favorable performance on plan assets during 2010.  In 2009, we recorded an after-tax charge of $27.3 million ($41.7 million pretax) to shareholders’ equity as of December 31, 2009 for our pension and other postretirement plans.  This charge reflected a 50-basis point decrease in the plans’ discount rate, partially offset by the favorable performance on plan assets during 2009.  In 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.  This charge reflected the unfavorable performance on plan assets during 2008.  The non-cash charges to shareholders’ equity do not affect our ability to borrow under our senior revolving credit facility.

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 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.  The laws require defined benefit pension plans to be fully funded for 2011.  Based on our plan assumptions and estimates, we will not be required to make any cash contributions to the domestic defined benefit pension plan at least through 2011.  We do have a small Canadian defined benefit pension plan to which we made $9.8 million and $4.5 million of cash contributions in 2010 and 2009, respectively, and we anticipate less than $5 million of cash contributions in 2011.  At December 31, 2010, the market value of assets in our defined benefit pension plans of $1,800.4 million exceeded the projected benefit obligation by $16.3 million.

In addition, the impact of declines in global equity and fixed income markets on asset values may result in higher pension costs and may increase and accelerate the need to fund the pension plan 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 2010 defined benefit pension plan income by approximately $15.8 million.

Holding all other assumptions constant, a 50-basis point decrease in the discount rate used to calculate pension income for 2010 and the projected benefit obligation as of December 31, 2010 would have decreased pension income by $0.6 million and increased the projected benefit obligation by $86.0 million.  A 50-basis point increase in the discount rate used to calculate pension income for 2010 and the projected benefit obligation as of December 31, 2010 would have increased pension income by $2.2 million and decreased the projected benefit obligation by $94.0 million.

 
 
 
14

 
 


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, 2010, we had $496.0 million of indebtedness outstanding, including $5.3 million representing the fair value related to $132.7 million of interest rate swaps and $2.8 million representing the unrecognized gain related to $75.0 million of interest rate swaps at December 31, 2010.  This outstanding indebtedness excludes our guarantee of $42.7 million of indebtedness of SunBelt.  This also does not include our $240.0 million senior revolving credit facility of which we had $231.4 million available on that date because we had issued $8.6 million of letters of credit or the $36.0 million not drawn from the Go Zone bonds issued in 2010.  As of December 31, 2010, our indebtedness represented 37.4% of our total capitalization.  At December 31, 2010, $77.8 million of our indebtedness was due within one year.

Our indebtedness could adversely affect our financial condition and limit our ability to fund working capital, capital expenditures and other general corporate purposes, to accommodate growth by reducing funds otherwise available for other corporate purposes, and to compete, which in turn could prevent us from fulfilling our obligations under our indebtedness.  In addition, our indebtedness could make us more vulnerable to any continuing downturn in general economic conditions and reduce our ability to respond to changing business and economic conditions.  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.

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.

 
 
 
15

 
 


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 damages 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 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.”


 
 
 
16

 
 

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.  At December 31, 2010 and 2009, our consolidated balance sheets included liabilities for these legal actions of $18.1 million and $15.8 million, respectively.  These liabilities do not include costs associated with legal representation.  Based on our analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect our financial statements or results of operations in the near term.

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, 2010.

Executive Officers of the Registrant as of February 23, 2011

Name and Age
 
Office
 
Served as an Olin Officer Since
Joseph D. Rupp (60)
 
Chairman, President and Chief Executive Officer
 
1996
Stephen C. Curley (59)
 
Vice President and Treasurer
 
2005
Dolores J. Ennico (58)
 
Vice President, Human Resources
 
2009
John E. Fischer (55)
 
Senior Vice President and Chief Financial Officer
 
2004
G. Bruce Greer, Jr. (50)
 
Vice President, Strategic Planning and Information Technology
 
2005
Richard M. Hammett (64)
 
Vice President and President, Winchester Division
 
2005
John L. McIntosh (56)
 
Senior Vice President, Operations
 
1999
George H. Pain (60)
 
Senior Vice President, General Counsel and Secretary
 
2002
Todd A. Slater (47)
 
Vice President, Finance 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.

All executive officers except Dolores J. Ennico have served as executive officers for more than five years.  Richard M. Hammett will retire from the Company on February 28, 2011.

Dolores J. Ennico was elected Vice President, Human Resources effective May 1, 2009.  Prior to that time and since October 2005, she served as Corporate Vice President, Human Resources.  From March 2004 to September 2005, she served as Vice President, Administration for Olin's Winchester Division and former Metals group.


 
 
 
17

 
 


PART II

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

As of January 31, 2011, we had 4,584 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 2010 and 2009 are listed below.  A dividend of $0.20 per common share was paid during each of the four quarters in 2010 and 2009.

2010
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
Market price of common stock per New York Stock Exchange composite transactions
                               
High
 
$
19.94
   
$
22.39
   
$
20.99
   
$
21.57
 
Low
   
15.30
     
14.35
     
17.25
     
17.90
 
                                 
2009
                       
Market price of common stock per New York Stock Exchange composite transactions
                       
High
 
$
19.79
   
$
16.70
   
$
18.40
   
$
18.03
 
Low
   
8.97
     
10.64
     
10.97
     
15.00
 

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, 2010
 
N/A
 
     
November 1-30, 2010
 
N/A
 
     
December 1-31, 2010
 
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, 2010, 4,845,924 shares had been repurchased, and 154,076 shares remain available for purchase under that program, which has no termination date.


 
 
 
18

 
 

Equity Compensation Plan Information

   
(a)
   
(b)
   
(c)
 
Plan Category
 
Number of securities to
be issued upon exercise of
outstanding options, warrants
and rights(1)
   
Weighted-average exercise
price of outstanding
options, warrants and
rights
   
Number of  securities remaining
available for future
issuance under equity compensation plans
 excluding securities reflected in column (a)(1)
 
Equity compensation plans approved by security holders(2)
   
4,736,000
(3)
 
$
17.39
(3)
   
3,595,904
 
Equity compensation plans not approved by security holders(4)
   
N/A
(4)
   
N/A
(4)
   
N/A
(4)
                         
Total
   
4,736,000
   
$
17.39
(3,4)
   
3,595,904
 

(1)
Number of shares is subject to adjustment for changes in capitalization for stock splits and stock dividends and similar events.

(2)
Consists of the 2000 Long Term Incentive Plan, the 2003 Long Term Incentive Plan, the 2006 Long Term Incentive Plan, the 2009 Long Term Incentive Plan and the 1997 Stock Plan for Non-employee Directors.  Does not include information about the equity compensation plan listed in the table below, which has expired.  No additional awards may be granted under this expired plan. As of December 31, 2010:

Plan Name
 
Expiration Date
 
Number of Securities
Issuable Under
Outstanding Options
   
Weighted
Average
Exercise Price
 
Weighted Average
Remaining Term
1996 Stock Option Plan for Key Employees of Olin Corporation and Subsidiaries
 
1/25/06
   
180,753
   
$
20.67
 
1.8 years

(3)
Includes:

 
3,664,398 shares issuable upon exercise of options with a weighted average exercise price of $17.39, and a weighted average remaining term of 6.6 years,

 
357,305 shares issuable under restricted stock unit grants, with a weighted average remaining term of 1.2 years,

 
425,250 shares issuable in connection with outstanding performance share awards, with a weighted average term of 1.1 years remaining in the performance measurement period, and

 
289,047 shares under the 1997 Stock Plan for Non-employee Directors which represent stock grants for retainers, other board and committee fees, and dividends on deferred stock under the plan.

(4)
Does not include information about equity compensation plans assumed in connection with the acquisition of Chase Industries Inc. (Chase) in September 2002 by merger.  No additional awards may be granted under those assumed plans.  As of December 31, 2010, options for a total of 4,260 shares, with a weighted average exercise price of $7.83 per share, and a weighted average remaining term of 0.7 years, were outstanding under the various plans assumed in connection with that acquisition.

 
 
 
19

 
 


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”) and (ii) the Peer Group.  Our Peer Group is comprised of Georgia Gulf Corporation, Occidental Petroleum Corporation, Alliant Techsystems, PPG Industries, Inc., The Dow Chemical Company and Westlake Chemical Corporation.
 
 
Stock Performance Graph
 

 
Data is for the five-year period from December 31, 2005 through December 31, 2010.  The cumulative return includes reinvestment of dividends.  The Peer Group is 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 the Peer Group for such year by (b) the total shareholder return for that corporation for such year.


 
 
 
20

 
 
Item 6.  SELECTED FINANCIAL DATA
 
TEN-YEAR SUMMARY
 
($ and shares in millions, except per share data)
 
2010
   
2009
   
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
   
2001
 
Operations
                                                           
Sales
 
$
1,586
   
$
1,532
   
$
1,765
   
$
1,277
   
$
1,040
   
$
955
   
$
766
   
$
703
   
$
604
   
$
653
 
Cost of goods sold
   
1,350
     
1,223
     
1,377
     
1,035
     
792
     
682
     
639
     
588
     
551
     
558
 
Selling and administration
   
134
     
135
     
137
     
129
     
129
     
128
     
90
     
78
     
70
     
74
 
Loss on restructuring of businesses
   
(34
)
   
     
     
     
     
     
(10
)
   
     
     
(10
)
Other operating income
   
2
     
9
     
1
     
2
     
7
     
9
     
6
     
     
     
 
Earnings (loss) of non-consolidated affiliates
   
30
     
38
     
39
     
46
     
45
     
37
     
9
     
6
     
(8
)
   
(9
)
Interest expense
   
25
     
12
     
13
     
22
     
20
     
20
     
20
     
20
     
26
     
17
 
Interest and other income (expense)
   
2
     
1
     
(20
)
   
12
     
12
     
20
     
5
     
3
     
4
     
22
 
Income (loss) before taxes from continuing operations
   
77
     
210
     
258
     
151
     
163
     
191
     
27
     
26
     
(47
)
   
7
 
Income tax provision (benefit)
   
12
     
74
     
100
     
50
     
39
     
74
     
8
     
8
     
(4
)
   
2
 
Income (loss) from continuing operations
   
65
     
136
     
158
     
101
     
124
     
117
     
19
     
18
     
(43
)
   
5
 
Discontinued operations, net
   
     
     
     
(110
)
   
26
     
21
     
36
     
(20
)
   
12
     
(14
)
Cumulative effect of accounting changes, net
   
     
     
     
     
     
(5
)
   
     
(22
)
   
     
 
Net income (loss)
 
$
65
   
$
136
   
$
158
   
$
(9
)
 
$
150
   
$
133
   
$
55
   
$
(24
)
 
$
(31
)
 
$
(9
)
Financial position
                                                                               
Cash and cash equivalents, short-term investments and restricted cash
 
$
561
   
$
459
   
$
247
   
$
333
   
$
276
   
$
304
   
$
147
   
$
190
   
$
136
   
$
202
 
Working capital, excluding cash and cash equivalents and short-term investments
   
33
     
91
     
24
     
(14
)
   
223
     
191
     
232
     
168
     
233
     
67
 
Property, plant and equipment, net
   
675
     
695
     
630
     
504
     
251
     
227
     
205
     
202
     
214
     
253
 
Total assets
   
2,049
     
1,932
     
1,720
     
1,731
     
1,642
     
1,802
     
1,621
     
1,448
     
1,426
     
1,221
 
Capitalization:
                                                                               
Short-term debt
   
78
     
     
     
10
     
2
     
1
     
52
     
27
     
2
     
102
 
Long-term debt
   
418
     
398
     
252
     
249
     
252
     
257
     
261
     
314
     
346
     
330
 
Shareholders’ equity
   
830
     
822
     
705
     
664
     
543
     
427
     
356
     
176
     
231
     
271
 
Total capitalization
 
$
1,326
   
$
1,220
   
$
957
   
$
923
   
$
797
   
$
685
   
$
669
   
$
517
   
$
579
   
$
703
 
Per share data
                                                                               
Basic:
                                                                               
Continuing operations
 
$
0.82
   
$
1.74
   
$
2.08
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
 
$
0.10
 
Discontinued operations, net
   
     
     
     
(1.48
)
   
0.36
     
0.30
     
0.53
     
(0.34
)
   
0.24
     
(0.32
)
Accounting changes, net
   
     
     
     
     
     
(0.08
)
   
     
(0.38
)
   
     
 
Net income (loss)
 
$
0.82
   
$
1.74
   
$
2.08
   
$
(0.12
)
 
$
2.06
   
$
1.87
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
 
$
(0.22
)
Diluted:
                                                                               
Continuing operations
 
$
0.81
   
$
1.73
   
$
2.07
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
 
$
0.10
 
Discontinued operations, net
   
     
     
     
(1.48
)
   
0.36
     
0.29
     
0.53
     
(0.34
)
   
0.24
     
(0.32
)
Accounting changes, net
   
     
     
     
     
     
(0.08
)
   
     
(0.38
)
   
     
 
Net income (loss)
 
$
0.81
   
$
1.73
   
$
2.07
   
$
(0.12
)
 
$
2.06
   
$
1.86
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
 
$
(0.22
)
                                                                                 
Common Cash Dividends
   
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
   
22.39
     
19.79
     
30.39
     
24.53
     
22.65
     
25.35
     
22.99
     
20.53
     
22.60
     
22.75
 
Low
   
14.35
     
8.97
     
12.52
     
15.97
     
14.22
     
16.65
     
15.20
     
14.97
     
13.85
     
12.05
 
Year end
   
20.52
     
17.52
     
18.08
     
19.33
     
16.52
     
19.68
     
22.02
     
20.06
     
15.55
     
16.14
 
Other
                                                                               
Capital expenditures
 
$
85
   
$
138
   
$
180
   
$
76
   
$
62
   
$
63
   
$
38
   
$
33
   
$
24
   
$
29
 
Depreciation
   
85
     
70
     
68
     
47
     
38
     
36
     
33
     
40
     
51
     
55
 
Common dividends paid
   
63
     
63
     
61
     
59
     
58
     
57
     
56
     
47
     
39
     
35
 
Purchases of common stock
   
     
     
     
     
     
     
     
     
3
     
14
 
Current ratio
   
2.3
     
2.8
     
1.7
     
1.8
     
2.2
     
2.3
     
2.1
     
2.1
     
2.4
     
1.8
 
Total debt to total capitalization
   
37.4
%
   
32.6
%
   
26.4
%
   
28.1
%
   
31.8
%
   
37.7
%
   
46.8
%
   
65.9
%
   
60.0
%
   
61.5
%
Effective tax rate
   
15.7
%
   
35.4
%
   
38.8
%
   
33.1
%
   
24.2
%
   
38.4
%
   
29.6
%
   
30.8
%
   
n/a
     
30.9
%
Average common shares outstanding - diluted
   
79.9
     
78.3
     
76.1
     
74.3
     
72.8
     
71.6
     
68.4
     
58.3
     
49.4
     
43.6
 
Shareholders
   
4,600
     
4,900
     
5,100
     
5,300
     
5,700
     
6,100
     
6,400
     
6,800
     
7,200
     
7,500
 
Employees(1)
   
3,700
     
3,700
     
3,600
     
3,600
     
3,100
     
2,900
     
2,800
     
2,700
     
3,000
     
2,700
 
 
Our Selected Financial Data reflects the following businesses as discontinued operations: Metals business in 2007 and Olin Aegis in 2004.  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.
 
21

 
Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS BACKGROUND

Our manufacturing operations are concentrated in two business segments:  Chlor Alkali Products and Winchester.  Both are capital intensive manufacturing businesses with operating rates closely tied to the general economy.  Each segment has a commodity element to it, and therefore, our ability to influence pricing is quite limited on the portion of the segment’s business that is strictly commodity.  Our Chlor Alkali Products 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

2010 Year

In 2010, Chlor Alkali Products’ segment income was $117.2 million, a decrease of 7% compared with the prior year.  Chlor Alkali Products’ began to experience improved chlorine and caustic soda demand during 2010 and experienced a record level of bleach sales.  Volumes for chlorine and caustic soda improved 15% compared to 2009, while volumes for bleach improved 18%.  Operating rates in Chlor Alkali Products for 2010 and 2009 were 82% and 70%, respectively.
 
    Our 2010 ECU netbacks of $475 were 9% lower than the 2009 netbacks of $520; however, the pricing trend has been positive throughout 2010 as ECU netbacks increased sequentially from the low level of $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year by at least 10% peaking in the third quarter of 2010 with a 91% operating rate during the summer demand season.  A significant portion of the North American chlor alkali demand improvement came from exports of products made from chlorine, driven by the energy advantage North America enjoys by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout the year.  During February 2010, an $80 per ton caustic soda price increase was announced.  We began realizing a portion of this price increase in caustic soda in the second quarter of 2010.  Caustic soda demand continued to improve, and as a result, during the third quarter of 2010, three additional caustic soda price increases were announced totaling $135 per ton.  We believe that a portion of the $135 per ton caustic soda price increases announced during the third quarter of 2010 will be realized.  We anticipate some additional benefits from these price increases and from contracts that re-set on an annual basis to be realized in the first half of 2011.  Additionally, we announced a $40 per ton caustic soda price increase in January 2011.  While the success of this $40 per ton caustic soda price increase is not yet known, some portion of the benefits of this price increase, if realized, would impact our system beginning in the second quarter of 2011.


 
 
 
22

 
 

    Winchester segment income of $63.0 million in 2010, which represented the second highest level of segment income in at least the last two decades, declined 8% compared to the prior year segment income of $68.6 million.  The higher than normal levels of commercial demand that began in the fourth quarter of 2008 continued through the second quarter of 2010.  Beginning with the third quarter of 2010, Winchester began to experience a decline in commercial demand from the 2009 levels.  However, the second half of 2010 commercial demand remained stronger than 2007 levels.  Commercial volumes, excluding rimfire, for 2010 decreased approximately 12% from prior year levels.

    On December 9, 2010, our board of directors approved a plan to convert the 260,000 tons of mercury cell capacity at our Charleston, TN facility to 200,000 tons of membrane capacity capable of producing both potassium hydroxide and caustic soda.  The project has an estimated capital cost of approximately $160 million.  The board of directors also approved a plan to reconfigure our Augusta, GA facility to manufacture bleach and distribute caustic soda, while discontinuing chlor alkali manufacturing at this site. This action will reduce our chlor alkali manufacturing capacity by 100,000 tons.  We based our decision on several factors.  First, over the past eighteen months we have experienced a steady increase in the number of customers unwilling to accept our products manufactured using mercury cell technology.  Second, there is federal legislation that was passed in 2008 governing the treatment of mercury that significantly limits our recycling options after December 31, 2012.  We concluded that exiting mercury cell technology production after 2012 represented an unacceptable future cost risk.  Further, the conversion of the Charleston, TN plant to membrane technology will reduce the electricity usage per ECU produced by approximately 25% and the configuration of the new plant will result in an increase in our capacity to produce potassium hydroxide.  The decision to reconfigure the Augusta, GA facility to manufacture bleach and distribute caustic soda removes the highest cost production capacity from our system.  We currently expect to complete these conversions by the end of 2012.

On November 3, 2010, we announced that we had made the decision to relocate Winchester centerfire ammunition operations from East Alton, IL to Oxford, MS.  This relocation, when completed, is forecast to reduce Winchester’s annual operating costs by approximately $30 million.  Consistent with this relocation decision we have initiated an estimated $110 million five-year project, which includes approximately $80 million of capital spending.  The State of Mississippi and local governments have provided incentives which should offset approximately 40 percent of the capital spending.  Once completed, Winchester expects to have the most modern centerfire ammunition production facility in North America.
 
    Our total restructuring charge for 2010 related to these actions was $34.2 million.  The restructuring charge included write-off of equipment and facility costs of $17.5 million, acceleration of asset retirement obligations of $6.7 million, employee severance and related benefit costs of $6.0 million, a non-cash pension and other postretirement benefits curtailment charge of $3.0 million, and lease and other contract termination costs of $1.0 million.  We expect to incur additional charges related to the implementation of plans to exit the use of mercury cell technology in the chlor alkali manufacturing process and the transfer of the Winchester centerfire ammunition operations over the next several years; however, at this time, we are not able to estimate the extent of any additional expenses that may be incurred in connection with these actions.

Income before taxes for 2010 included $7.2 million of recoveries from third parties for environmental costs incurred and expensed in prior periods.  For 2009, income before taxes also included $82.1 million of recoveries from third parties for environmental costs incurred and expensed in prior periods.

Income tax expense for 2010 included $13.5 million of favorable adjustments associated with the expiration of statutes of limitation in domestic and foreign jurisdictions and a reduction in expense related to the release of a valuation allowance recorded against the foreign tax credit carryforward deferred tax asset generated by our Canadian operations.  Income tax expense for 2009 included $6.0 million of favorable adjustments associated with the expiration of statutes of limitation in domestic and foreign jurisdictions and reductions in expense associated with the finalization of the 2008 income tax returns.


 
 
 
23

 
 

In September 2010, we redeemed industrial development and environmental improvement tax-exempt bonds (industrial revenue bonds) totaling $18.9 million, with maturity dates of February 2016 and March 2016.  We paid a premium of $0.4 million to the bond holders, which was included in interest expense.  We also recognized a $0.3 million deferred gain in interest expense related to the interest rate swaps, which were terminated in April 2010, on these industrial revenue bonds.  In October 2010, we redeemed additional industrial revenue bonds totaling $1.8 million, with a maturity date of October 2014.
 
    In October 2010, we completed a financing of Go Zone and Recovery Zone tax-exempt bonds totaling $70.0 million due 2024.  We have the option to borrow up to the entire $70.0 million in a series of draw downs through December 31, 2011.  During 2010, we drew $34.0 million of these bonds.  The proceeds from these bonds are required to be used to fund capital project spending at our McIntosh, AL facility.  In December 2010, we completed a financing of Recovery Zone tax exempt bonds totaling $83.0 million due in 2033 and 2035.  During 2010, we drew the entire $83.0 million of the bonds.  The proceeds from the bonds are required to be used to fund the Charleston, TN facility mercury cell conversion and our Oxford, MS Winchester relocation.  Of the $117.0 million drawn from the Go Zone and Recovery Zone bonds, $102.0 million of the associated cash was classified as a noncurrent asset on our consolidated balance sheet as restricted cash, until such time as we request reimbursement of qualifying amounts used to fund the capital projects in Alabama, Mississippi and Tennessee.

The Patient Protection and Affordable Healthcare Act was signed into law on March 23, 2010 and the Healthcare and Education Reconciliation Act of 2010 was signed into law on March 31, 2010 (collectively the Healthcare Acts).  The impact of the Healthcare Acts did not have a material effect on our consolidated financial statements.

2009 Year

In 2009, Chlor Alkali Products’ segment income was $125.4 million, a decline of 62% compared with 2008.  Chlor Alkali Products continued to experience the weak product demand that began in the fourth quarter of 2008.  Volumes for chlorine and caustic soda decreased 22% compared to 2008.  Volumes for bleach, which accounted for approximately 12% of Chlor Alkali Products’ sales, increased 17% compared to 2008.  Operating rates in Chlor Alkali Products for 2009 and 2008 were 70% and 82%, respectively.  These operating rates assume that 100% of our demonstrated capacity was available for use.  The capacity of our St. Gabriel, LA facility had been shutdown since late November 2008 and the facility was not available for use until the conversion and expansion project was completed in the fourth quarter of 2009.  In addition, in response to low levels of customer demand for chlorine and caustic soda, an additional 5% of our chlorine and caustic soda capacity was idled by us in 2009.  After taking these capacity reduction actions into consideration, our effective operating rate for 2009 was 78%.

Our 2009 ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting the changes in the pricing dynamics in North America.  During 2008, North American demand for caustic soda was strong, while supply continued to be constrained by the weakness in chlorine demand.  This resulted in a significant supply and demand imbalance for caustic soda in North America, which resulted in record caustic soda pricing.  The result was a record ECU netback, in our system, in the first quarter of 2009 of approximately $765.  Beginning late in the fourth quarter of 2008 and continuing through 2009, demand for caustic soda weakened significantly, and fell below the demand for chlorine.  This created excess supply in North America, which caused caustic soda prices to fall.  The over supply of caustic soda caused industry operating rates to be constrained, which resulted in chlorine price increase announcements of $300 per ton during the second quarter of 2009.  Caustic soda prices declined precipitously in the second quarter of 2009 and these declines continued into the third quarter of 2009.  During the third quarter of 2009, chlorine and caustic soda demand became more balanced eliminating the oversupply of caustic soda.  We began realizing increases in chlorine prices in the third quarter of 2009 with most of the improvement in the fourth quarter of 2009.  ECU netbacks, in our system, bottomed out in the third quarter of 2009.  During the fourth quarter of 2009, as caustic soda demand improved, chlorine production declined due to seasonally weaker demand.  This resulted in a supply and demand imbalance for caustic soda in North America.  As a result of this imbalance, in December 2009, a $75 per ton caustic soda price increase was announced.  We began realizing the benefits of this price increase in caustic soda in the first half of 2010.


 
 
 
24

 
 

Winchester segment income of $68.6 million in 2009, which represented the highest level of segment income in at least the last two decades, improved 110% compared to 2008 segment income of $32.6 million.  Winchester continued to experience the above normal levels of demand during 2009 that began around the November 2008 presidential election.  The increase in demand was across the majority of Winchester’s product offerings, including rifle, pistol and rimfire ammunition.  On a volume basis, Winchester’s unit shipments increased 14% in 2009 compared to 2008, which was driven by the higher level of commercial sales.  Winchester’s results reflected the impact of increased volumes and higher selling prices, and lower commodity and other material costs.

Income from continuing operations before taxes for 2009 included $82.1 million of recoveries from third parties for environmental costs incurred and expensed in prior periods.

On August 19, 2009, we sold $150.0 million of 8.875% Senior Notes (2019 Notes) with a maturity date of August 15, 2019.  The 2019 Notes were issued at 99.19% of par value, providing a yield to maturity to investors of 9.0%.  Interest is paid semi-annually in arrears on each February 15 and August 15.  Proceeds of $145.5 million, after expenses of $3.3 million, from the 2019 Notes were used to further strengthen our long-term liquidity.

During the fourth quarter of 2009, we completed a conversion and expansion project at our St. Gabriel, LA facility and initiated production.  This project increased capacity at this location from 197,000 ECUs to 246,000 ECUs and significantly reduced the site’s manufacturing costs.  Our capital spending included $69.6 million and $87.2 million for the St. Gabriel, LA facility conversion and expansion project in 2009 and 2008, respectively.

During the second and third quarters of 2009, bills were introduced in the United States House of Representatives and the Senate, respectively, which, if enacted, would ban the production of chlor alkali products using mercury cell technology two years from the date it is enacted into law.  On October 21, 2009, the House of Representatives Committee on Energy and Commerce passed a bill that would require chlor alkali producers using mercury cell technology to make a decision by June 30, 2012 as to whether to shutdown or convert these facilities.  If the decision was to convert, the mercury cell plants would have been required to be converted by June 30, 2015.  If the decision was not to convert, the plants would have been required to be shutdown by June 30, 2013.  For this bill to become law it would have had to be passed by the full House of Representatives and the full Senate.  The proposed legislation expired without enactment at the end of 2010 and we are uncertain as to whether or not similar legislation may be proposed in the future.  We currently operate two facilities which utilize mercury cell technology totaling approximately 360,000 ECUs of capacity (approximately 18% of our capacity).  We operate our mercury cell facilities in full compliance with all environmental rules and regulations.  On December 9, 2010, our board of directors approved a plan to convert the 260,000 tons of mercury cell capacity at our Charleston, TN facility to 200,000 tons of membrane capacity capable of producing both potassium hydroxide and caustic soda.  The board of directors also approved a plan to reconfigure our Augusta, GA facility to manufacture bleach and distribute caustic soda, while discontinuing chlor alkali manufacturing at this site.  We currently expect to complete these conversions by the end of 2012.

2008 Year

In 2008, Chlor Alkali Products had record segment income of $328.3 million, an improvement of 38% compared with 2007.  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, which were negatively impacted during the fourth quarter of 2008 by lower levels of demand from all 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, would not resume operations until the conversion and expansion project was completed.  The project was completed in the fourth quarter of 2009.  The St. Gabriel, LA facility represents approximately 10% of our chlorine and caustic soda capacity.


 
 
 
25

 
 

During the first three quarters of 2008, North American demand for caustic soda was strong.  In addition, 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 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.

On March 12, 2008, we announced that, in connection with our plans to streamline Chlor Alkali Products manufacturing operations in Canada in order to serve our customer base in a more cost effective manner, we would close the acquired Dalhousie, New Brunswick, Canada chlorine, caustic soda, sodium chlorate, and 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 $2.2 million of costs associated with this shutdown as of December 31, 2010.  This action generated $8 million to $10 million of annual pretax savings.

Winchester segment income was $32.6 million in 2008, which represented the highest level of segment income in at least the last two decades at that time for the Winchester business, an increase of 23% compared with 2007.  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 income (expense) 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 has been recognized for the impairment loss.

In 2008, the domestic 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.


 
 
 
26

 
 

CHLOR ALKALI PRODUCTS PRICING

In accordance with industry practice, we calculate Chlor Alkali Products’ prices on an ECU 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 2010, 2009, and 2008 were as follows:
 
   
2010
   
2009
   
2008
 
First quarter
 
$
440
   
$
765
   
$
580
 
Second quarter
   
470
     
585
     
590
 
Third quarter
   
465
     
375
     
660
 
Fourth quarter
   
515
     
425
     
740
 
Annual average
   
475
     
520
     
635
 

During the first three quarters of 2008, North American demand for caustic soda was 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.  The result was a record ECU netback, in our system, in the first quarter of 2009.

Our 2009 ECU netbacks of $520 were 18% lower than the 2008 netbacks of $635, reflecting the changes in the pricing dynamics in North America.  Beginning late in the fourth quarter of 2008 and continuing through 2009, demand for caustic soda weakened significantly, and fell below the demand for chlorine.  This created excess supply in North America, which caused caustic soda prices to fall.  The over supply of caustic soda caused industry operating rates to be constrained, which resulted in chlorine price increase announcements of $300 per ton during the second quarter of 2009.  Caustic soda prices declined precipitously in the second quarter of 2009 and these declines continued into the third quarter of 2009.  During the third quarter of 2009, chlorine and caustic soda demand became more balanced eliminating the oversupply of caustic soda.  We began realizing increases in chlorine prices in the third quarter of 2009 with most of the improvement in the fourth quarter of 2009.  ECU netbacks, in our system, bottomed out in the third quarter of 2009.  During the fourth quarter of 2009, as caustic soda demand improved, chlorine production declined due to seasonally weaker demand.  This resulted in a supply and demand imbalance for caustic soda in North America.  As a result of this imbalance, in December 2009, a $75 per ton caustic soda price increase was announced.  We began realizing the benefits of this price increase in caustic soda in the first half of 2010.


 
 
 
27

 
 
 
    Our 2010 ECU netbacks of $475 were 9% lower than the 2009 netbacks of $520; however, the pricing trend has been positive throughout 2010 as ECU netbacks increased sequentially from the low level of $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year by at least 10% peaking in the third quarter of 2010 with a 91% operating rate during the summer demand season.  A significant portion of the North American chlor alkali demand improvement came from exports of products made from chlorine, driven by the energy advantage North America enjoys by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout the year.  During February 2010, an $80 per ton caustic soda price increase was announced.  We began realizing a portion of this price increase in caustic soda in the second quarter of 2010.  Caustic soda demand continued to improve, and as a result, during the third quarter of 2010, three additional caustic soda price increases were announced totaling $135 per ton.  We believe that a portion of the $135 per ton caustic soda price increases announced during the third quarter of 2010 will be realized.  We anticipate some additional benefits from these price increases and from contracts that re-set on an annual basis to be realized in the first half of 2011.  Additionally, we announced a $40 per ton caustic soda price increase in January 2011.  While the success of this $40 per ton caustic soda price increase is not yet known, some portion of the benefits of this price increase, if realized, would impact our system beginning in the second quarter of 2011.

PENSION AND POSTRETIREMENT BENEFITS

Under ASC 715, formerly SFAS No. 158, we recorded an after-tax charge of $26.0 million ($42.3 million pretax) to shareholders’ equity as of December 31, 2010 for our pension and other postretirement plans.  This charge reflected a 45-basis point decrease in the plans’ discount rate, partially offset by the favorable performance on plan assets during 2010.  In 2009, we recorded an after-tax charge of $27.3 million ($41.7 million pretax) to shareholders’ equity as of December 31, 2009 for our pension and other postretirement plans.  This charge reflected a 50-basis point decrease in the plans’ discount rate, partially offset by the favorable performance on plan assets during 2009.  In 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.  This charge reflected the unfavorable performance on plan assets during 2008.  The non-cash charges to shareholders’ equity do not affect our ability to borrow under our senior revolving credit facility.

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 pension plans to be fully funded for 2011.  Based on our plan assumptions and estimates, we will not be required to make any cash contributions to the domestic defined benefit pension plan at least through 2011.  We do have a small Canadian defined benefit pension plan to which we made $9.8 million and $4.5 million of cash contributions in 2010 and 2009, respectively, and we anticipate less than $5 million of cash contributions in 2011.  At December 31, 2010, the market value of assets in our defined benefit pension plans of $1,800.4 million exceeded the projected benefit obligation by $16.3 million.

Components of net periodic benefit (income) costs were:
   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
   
($ in millions)
 
Pension benefits
 
$
(17.7
)
 
$
(16.7
)
 
$
(7.6
)
Other postretirement benefits
   
7.3
     
7.3
     
8.5
 


 
 
 
28

 
 

In December 2010, we recorded a curtailment charge for pension benefits of $3.2 million and a credit for other postretirement benefits of $0.2 million associated with the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  These amounts were included in the restructuring charge for 2010.  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 March 2010, we recorded a charge of $1.3 million associated with an agreement to withdraw our Henderson, NV chlor alkali hourly workforce from a multi-employer defined benefit pension plan.

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.

CONSOLIDATED RESULTS OF OPERATIONS
   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
   
($ in millions, except per share data)
 
Sales
 
$
1,585.9
   
$
1,531.5
   
$
1,764.5
 
Cost of goods sold
   
1,349.9
     
1,222.7
     
1,377.2
 
Gross margin
   
236.0
     
308.8
     
387.3
 
Selling and administration
   
134.4
     
135.3
     
137.3
 
Restructuring charge
   
34.2
     
     
 
Other operating income
   
2.5
     
9.1
     
1.2
 
Operating income
   
69.9
     
182.6
     
251.2
 
Earnings of non-consolidated affiliates
   
29.9
     
37.7
     
39.4
 
Interest expense
   
25.4
     
11.6
     
13.3
 
Interest income
   
1.0
     
1.1
     
6.2
 
Other income (expense)
   
1.5
     
0.1
     
(26.0
)
Income before taxes
   
76.9
     
209.9
     
257.5
 
Income tax provision
   
12.1
     
74.2
     
99.8
 
Net income
 
$
64.8
   
$
135.7
   
$
157.7
 
Net income per common share:
                       
Basic
 
$
0.82
   
$
1.74
   
$
2.08
 
Diluted
 
$
0.81
   
$
1.73
   
$
2.07
 

2010 Compared to 2009

Our total sales for 2010 were $1,585.9 million compared to $1,531.5 million last year, an increase of $54.4 million, or 4%.  Chlor Alkali Products’ sales increased by $72.8 million, or 8%, primarily due to increased shipment volumes partially offset by lower ECU prices.  Our ECU netbacks, excluding SunBelt, decreased 9% compared to last year.  Winchester sales decreased by $18.4 million, or 3%, from 2009 primarily due to the decline in shipments to commercial customers, partially offset by higher shipments to military, international, industrial and law enforcement customers.


 
 
 
29

 
 

Gross margin decreased $72.8 million, or 24%, from 2009, primarily due to the impact of decreased recoveries from third parties for environmental costs incurred and expensed in prior periods.  Gross margin in 2010 was also impacted by lower Winchester gross margin resulting from decreased volumes and decreased Chlor Alkali gross margin resulting from lower ECU netbacks, partially offset by higher volumes.  Gross margin as a percentage of sales decreased to 15% in 2010 from 20% in 2009.

Selling and administration expenses in 2010 decreased $0.9 million, or 1%, from 2009, primarily due to lower bad debt costs of $6.7 million, resulting from a deterioration in customer credit in 2009, lower salary and benefit costs of $3.4 million, and decreased consulting charges of $1.4 million.  These decreases were offset by higher non-income taxes of $4.7 million, primarily due to a favorable resolution of a Canadian capital tax matter in 2009, a higher level of legal and legal-related settlement expenses of $3.2 million, increased stock-based compensation expense of $1.9 million, primarily due to mark-to-market adjustments, and increased recruiting and relocation charges of $1.1 million.  Selling and administration expenses as a percentage of sales were 8% in 2010 and 9% in 2009.
 
    Restructuring charge in 2010 of $34.2 million included charges associated with the implementation of plans to exit the use of mercury cell technology in the chlor alkali manufacturing process by the end of 2012 and the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.

Other operating income for 2010 decreased by $6.6 million from 2009.  Other operating income for 2010 and 2009 included $1.1 million and $1.6 million, respectively, of gains on the disposition of property, plant and equipment primarily associated with the St. Gabriel, LA conversion and expansion project.  Other operating income for 2009 also included a $3.7 million gain on the sale of land, a $1.2 million gain on the disposition of a former manufacturing facility and a $0.8 million gain for the sale of other assets.

The earnings of non-consolidated affiliates were $29.9 million for 2010, a decrease of $7.8 million from 2009, primarily due to lower ECU prices at SunBelt.

Interest expense increased by $13.8 million for 2010 primarily due to a higher level of outstanding debt and a decrease of $8.8 million in capitalized interest primarily associated with our St. Gabriel, LA facility conversion and expansion project, which was completed in the fourth quarter of 2009, partially offset by lower interest rates.

Interest income decreased by $0.1 million, or 9%, compared to 2009, primarily due to lower short-term interest rates, partially offset by higher average cash balances.

Other income (expense) in 2010 included a $1.4 million recovery from an investment in corporate debt securities that was written off in 2008.

The effective tax rate for 2010 included a $9.2 million reduction in expense associated with the expiration of statutes of limitation in domestic and foreign jurisdictions, and a $4.3 million reduction in expense related to the release of a valuation allowance recorded against the foreign tax credit carryforward deferred tax asset generated by our Canadian operations.  After giving consideration to these two items of $13.5 million, the effective tax rate for 2010 of 33.3% was lower than the 35% U.S. federal statutory rate primarily due to favorable tax benefits of permanent tax deduction items, including the domestic manufacturing deduction and tax deductible dividends paid to the Contributing Employee Ownership Plan (CEOP), which were offset in part by state income taxes.  During periods of low earnings, our effective tax rate can be significantly impacted by permanent tax reduction items, return to provision adjustments, changes in tax contingencies and valuation allowances, and tax credits.  The effective tax rate for 2009 included a $2.8 million reduction in expense primarily associated with the finalization of the 2008 income tax returns, which resulted in lower state tax expense, and a $3.2 million reduction in expense primarily associated with the expiration of statutes of limitation in domestic and foreign jurisdictions.  After giving consideration to these two items of $6.0 million, the effective tax rate for 2009 of 38.2%, was higher than the 35% U.S. federal statutory rate primarily due to state income taxes, which were offset in part by the utilization of certain state tax credits.


 
 
 
30

 
 

2009 Compared to 2008

Our total sales for 2009 were $1,531.5 million compared to $1,764.5 million in 2008, a decrease of $233.0 million, or 13%.  Chlor Alkali Products’ sales decreased by $311.6 million, or 24%, primarily due to decreased shipment volumes and lower ECU prices.  Our ECU netbacks, excluding SunBelt, decreased 18% compared to 2008.  Winchester sales increased by $78.6 million, or 16%, from 2008 primarily due to increased volumes.

Gross margin decreased $78.5 million, or 20%, from 2008, due to decreased Chlor Alkali gross margin resulting from lower volumes and decreased ECU netbacks, partially offset by improved Winchester gross margin resulting from higher volumes and lower commodity and other material costs.  The 2009 gross margin was positively impacted by recoveries from third parties for environmental costs incurred and expensed in prior periods of $82.1 million.  Gross margin as a percentage of sales decreased to 20% in 2009 from 22% in 2008.

Selling and administration expenses in 2009 decreased $2.0 million, or 1%, from 2008, primarily due to lower non-income taxes of $5.3 million, primarily due to a favorable resolution of a Canadian capital tax matter, lower recruiting and relocation charges of $4.3 million, and decreased management incentive compensation expense of $2.5 million, which included mark-to-market adjustments on stock-based compensation, partially offset by a higher level of legal and legal-related settlement expenses of $3.6 million, which included costs for recovery actions for environmental costs previously incurred and expensed, a higher provision for doubtful customer accounts receivable of $2.6 million related to a deterioration in customer credit, increased consulting and professional fees of $2.3 million and higher salary and benefit costs of $1.6 million.  Selling and administration expenses as a percentage of sales were 9% in 2009 and 8% in 2008.

Other operating income in 2009 increased by $7.9 million from 2008.  Other operating income for 2009 included gains of $6.5 million on the disposition of property, plant, and equipment compared to a loss of $0.7 million for 2008.  The 2009 gains were primarily associated with sales of real estate and dispositions of assets associated with the St. Gabriel, LA facility conversion and expansion project.  Other operating income for 2009 also included a gain of $0.8 million for the sale of other assets.

The earnings of non-consolidated affiliates were $37.7 million for 2009, a decrease of $1.7 million from 2008, primarily due to lower ECU prices at SunBelt, partially offset by increased earnings at our bleach joint venture.

Interest expense decreased by $1.7 million, or 13%, in 2009 primarily due to an increase of $4.7 million in capitalized interest associated with our St. Gabriel, LA facility conversion and expansion project and a major maintenance capital project at our McIntosh, AL facility, partially offset by a higher level of outstanding debt.

Interest income decreased by $5.1 million, or 82%, in 2009 primarily due to lower short-term interest rates.

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

The effective tax rate for 2009 included a $2.8 million reduction in expense primarily associated with the finalization of the 2008 income tax returns, which resulted in lower state tax expense, and a $3.2 million reduction in expense primarily associated with the expiration of statutes of limitation in domestic and foreign jurisdictions.  After giving consideration to these two items of $6.0 million, the effective tax rate for 2009 of 38.2%, was higher than the 35% U.S. federal statutory rate primarily due to state income taxes, which were offset in part by the utilization of certain state tax credits.  The effective tax rate for 2008 included expense of $10.4 million for a valuation allowance required against the deferred tax benefit resulting from the $26.6 million capital loss carryforward generated from the impairment of corporate debt securities.  The effective tax rate for 2008 also 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.  After giving consideration to these two items of $8.3 million, the effective tax rate for 2008 of 35.5% 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.


 
 
 
31

 
 

SEGMENT RESULTS

We define segment results as income (loss) before interest expense, interest income, other operating income, other income (expense), and income taxes and include the results of non-consolidated affiliates.  Consistent with the guidance in ASC 280 “Segment Reporting” (ASC 280), formerly 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.

   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
Sales:
 
($ in millions)
 
Chlor Alkali Products
 
$
1,036.6
   
$
963.8
   
$
1,275.4
 
Winchester
   
549.3
     
567.7
     
489.1
 
Total sales
 
$
1,585.9
   
$
1,531.5
   
$
1,764.5
 
Income before taxes
                       
Chlor Alkali Products(1)
 
$
117.2
   
$
125.4
   
$
328.3
 
Winchester
   
63.0
     
68.6
     
32.6
 
Corporate/Other:
                       
Pension income(2)
   
24.6
     
22.3
     
14.8
 
Environmental (expense) income(3)
   
(9.1
)
   
58.0
     
(27.7
)
Other corporate and unallocated costs
   
(64.2
)
   
(63.1
)
   
(58.6
)
Restructuring charge(4)
   
(34.2
)
   
     
 
Other operating income(5)
   
2.5
     
9.1
     
1.2
 
Interest expense(6)
   
(25.4
)
   
(11.6
)
   
(13.3
)
Interest income
   
1.0
     
1.1
     
6.2
 
Other income (expense)(7)
   
1.5
     
0.1
     
(26.0
)
Income before taxes
 
$
76.9
   
$
209.9
   
$
257.5
 

(1)
Earnings of non-consolidated affiliates are included in the Chlor Alkali Products segment results consistent with management’s monitoring of the operating segment.  The earnings from non-consolidated affiliates were $29.9 million, $37.7 million, and $39.4 million for the years ended 2010, 2009 and 2008, respectively.

(2)
The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data.  All other components of pension costs are included in corporate/other and include items such as the expected return on plan assets, interest cost and recognized actuarial gains and losses.  Pension income for the year ended December 31, 2010 included a charge of $1.3 million associated with an agreement to withdraw our Henderson, NV chlor alkali hourly workforce from a multi-employer defined benefit pension plan.  Pension income for the year ended December 31, 2008 included 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 Products’ hourly workforce from a defined benefit pension plan to a defined contribution pension plan.

 
 
 
32

 
 


(3)
Environmental (expense) income for the years ended 2010 and 2009 included $7.2 million and $82.1 million, respectively, of recoveries from third parties for costs incurred and expensed in prior periods.  Environmental (expense) income is included in cost of goods sold in the consolidated statements of operations.

(4)
Restructuring charge for the year ended December 31, 2010 of $34.2 million included charges associated with the implementation of plans to exit the use of mercury cell technology in the chlor alkali manufacturing process by the end of 2012 and the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.

(5)
Other operating income for the years ended 2010 and 2009 included $1.1 million and $1.6 million of gains on the disposal of assets primarily associated with the St. Gabriel, LA conversion and expansion project.  Other operating income for 2009 also included a $3.7 million gain on the sale of land, a $1.2 million gain on the disposition of a former manufacturing facility and $0.8 million for the sale of other assets.

(6)
Interest expense was reduced by capitalized interest of $0.9 million, $9.7 million and $5.0 million for the years ended 2010, 2009 and 2008, respectively.

(7)
Other income (expense) in 2010 included a $1.4 million recovery from a $26.6 million investment in corporate debt securities, whose full value was written off in 2008.  We are currently unable to utilize the capital loss resulting from the impairment of these corporate debt securities; therefore, no tax benefit has been recognized for the impairment loss.

Chlor Alkali Products

2010 Compared to 2009

Chlor Alkali Products’ sales for 2010 were $1,036.6 million compared to $963.8 million for 2009, an increase of $72.8 million, or 8%.  The sales increase was primarily due to higher chlorine and caustic soda volumes of 15%, partially offset by lower ECU pricing, which decreased 9% from 2009.  Volumes for potassium hydroxide increased 58% for 2010 primarily reflecting a raw material supply disruption that impacted the first half of 2009 volumes.  Bleach volumes and hydrochloric acid volumes also increased 18% and 10%, respectively, for 2010.  Sales for potassium hydroxide, bleach, and hydrochloric acid represented approximately 25% of Chlor Alkali Products’ sales in 2010.  Our ECU netbacks, excluding SunBelt, were approximately $475 compared to approximately $520 for 2009.  Freight costs included in the ECU netback decreased 4% for 2010 compared to 2009, and reflected the benefits of increased pipeline shipments associated with the full year operations of our St. Gabriel, LA facility, which more than offset higher railroad freight rates.  Our operating rate for 2010 was 82%, compared to our operating rate of 70% for 2009.  The higher operating rate for 2010 resulted from higher chlorine, bleach and hydrochloric acid demand.

Chlor Alkali Products’ posted segment income of $117.2 million for 2010 compared to $125.4 million for 2009, a decrease of $8.2 million, or 7%.  Chlor Alkali segment income was lower primarily due to lower ECU netbacks ($109.2 million) and lower earnings of non-consolidated affiliates ($7.8 million), primarily related to lower ECU netbacks at SunBelt, partially offset by increased volumes ($97.3 million) and decreased operating costs ($11.5 million), primarily raw materials and electricity.  The operating results from SunBelt included interest expense of $3.5 million and $4.0 million in 2010 and 2009, respectively, on the SunBelt Notes.


 
 
 
33

 
 

2009 Compared to 2008

Chlor Alkali Products’ sales for 2009 were $963.8 million compared to $1,275.4 million for 2008, a decrease of $311.6 million, or 24%.  The sales decrease was primarily due to lower chlorine and caustic soda volumes of 22%, and lower ECU pricing, which decreased 18% from 2008.  Volumes for bleach, which accounted for approximately 12% of Chlor Alkali Products’ sales, increased 17% compared to 2008.  Our ECU netbacks, excluding SunBelt, were approximately $520 compared to approximately $635 for 2008.  Freight costs included in the ECU netback increased 9% for 2009 compared to 2008.  Our operating rate for 2009 was 70%, compared to our operating rate of 82% for 2008.  The lower operating rate for 2009 was the result of lower caustic soda and chlorine demand.

Chlor Alkali Products’ posted segment income of $125.4 million for 2009 compared to $328.3 million for 2008, a decrease of $202.9 million, or 62%.  Chlor Alkali segment income was lower primarily due to lower ECU netbacks ($126.9 million), decreased volumes ($69.1 million), higher operating costs ($5.2 million), and lower earnings of non-consolidated affiliates ($1.7 million).  The lower earnings of non-consolidated affiliates primarily resulted from lower ECU prices at SunBelt, partially offset by increased earnings at our bleach joint venture.  The operating results from SunBelt included interest expense of $4.0 million and $4.4 million in 2009 and 2008, respectively, on the SunBelt Notes.

Winchester

2010 Compared to 2009

Winchester sales were $549.3 million for 2010 compared to $567.7 million for 2009, a decrease of $18.4 million, or 3%.  Sales of ammunition to domestic commercial customers decreased $38.8 million.  Beginning with the third quarter of 2010, Winchester began to experience a decline in commercial demand from the 2009 levels.  However, the second half of 2010 commercial demand remained stronger than the 2007 levels.  These decreases in domestic commercial sales were partially offset by higher shipments to military customers of $7.9 million, higher shipments to international customers of $5.4 million and increased shipments to industrial customers, who primarily supply the construction sector, of $4.1 million.  Shipments to law enforcement agencies also increased $2.7 million.

Winchester reported segment income of $63.0 million for 2010 compared to $68.6 million for 2009, a decrease of $5.6 million, or 8%.  The decrease was primarily due to the combination of lower volumes, a less favorable product mix and higher operating costs ($11.3 million), partially offset by improved pricing, decreased commodity and other material costs, and lower bad debt costs ($5.7 million).

2009 Compared to 2008

Winchester sales were $567.7 million for 2009 compared to $489.1 million for 2008, an increase of $78.6 million, or 16%.  Sales of ammunition to domestic and international commercial customers increased $66.1 million.  Winchester continued to experience the above normal levels of demand in 2009 that began around the November 2008 presidential election.  The increase in demand was across the majority of Winchester’s product offerings, including rifle, pistol and rimfire ammunition.  Shipments to military customers also increased $20.3 million.  These increases were partially offset by lower shipments to industrial customers, who primarily supply the construction sector, of $7.8 million and decreased shipments to law enforcement agencies of $3.3 million.  On a volume basis, Winchester’s overall unit shipments increased 14%, which was driven by the higher level of commercial sales.

Winchester reported segment income of $68.6 million for 2009 compared to $32.6 million for 2008, an increase of $36.0 million, or 110%.  The increase was primarily due to the impact of increased volumes and higher selling prices ($24.7 million) and decreased commodity and other material costs partially offset by higher operating costs ($10.7 million).


 
 
 
34

 
 

Corporate/Other

2010 Compared to 2009

For 2010, pension income included in corporate/other was $24.6 million compared to $22.3 million for 2009.  Pension income for 2010 included a charge of $1.3 million associated with an agreement to withdraw our Henderson, NV chlor alkali hourly workforce from a multi-employer defined benefit pension plan.  On a total company basis, defined benefit pension income for 2010 was $17.7 million compared to $16.7 million for 2009.  Pension income on a total company basis for 2010 included a curtailment charge of $3.2 million associated with the relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS, which was included in the restructuring charge for 2010.

Charges to income for environmental investigatory and remedial activities were $9.1 million for 2010 compared to credits to income of $58.0 million for 2009, which included $7.2 million and $82.1 million, respectively, of recoveries from third parties for costs incurred and expensed in prior periods.  Without these recoveries, charges to income for environmental investigatory and remedial activities would have been $16.3 million for 2010 compared with $24.1 million for 2009.  These charges relate primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.

For 2010, other corporate and unallocated costs were $64.2 million compared with $63.1 million for 2009, an increase of $1.1 million, or 2%.  The increase was primarily due to higher non-income taxes of $4.6 million, resulting from a favorable resolution of a Canadian capital tax matter in 2009, increased management incentive compensation costs of $2.3 million, which includes mark-to-market adjustments on stock-based compensation, and increased legal and legal-related settlement expenses of $1.9 million, partially offset by lower asset retirement obligation charges of $5.8 million, primarily related to decreases in estimated costs for certain assets and lower spending than expected on projects completed in 2010, and decreased salary and benefit costs of $1.9 million.

2009 Compared to 2008

For 2009, pension income included in corporate/other was $22.3 million compared to $14.8 million for 2008.  Pension income for 2008 included a curtailment charge 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.  On a total company basis, defined benefit pension income for 2009 was $16.7 million compared to $7.6 million for 2008.

Credits to income for environmental investigatory and remedial activities were $58.0 million for 2009, which includes $82.1 million of recoveries from third parties of costs incurred and expensed in prior periods.  Without these recoveries in 2009, charges to income for environmental investigatory and remedial activities would have been $24.1 million for 2009 compared with $27.7 million for 2008.  These charges relate primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.

For 2009, other corporate and unallocated costs were $63.1 million compared with $58.6 million in 2008, an increase of $4.5 million, or 8%.  The increase was primarily due to higher asset retirement obligation charges of $4.4 million, primarily related to increases in estimated costs for certain assets, increased legal and legal-related settlement expenses of $3.3 million, which included costs for recovery actions for environmental costs previously incurred and expensed, increased consulting and professional fees of $1.5 million and higher salary and benefit costs of $1.3 million, partially offset by lower non-income taxes of $5.1 million, primarily due to a favorable resolution of a Canadian capital tax matter, and decreased management incentive compensation costs of $1.1 million, which includes mark-to-market adjustments on stock-based compensation.



 
 
 
35

 
 

2011 OUTLOOK

Net income in the first quarter of 2011 is projected to be in the $0.20 to $0.25 per diluted share range compared with $0.18 per diluted share in the first quarter of 2010.

In Chlor Alkali Products, the first quarter of 2011 segment earnings are expected to improve compared to both the fourth quarter of 2010 earnings of $36.5 million and the first quarter of 2010 earnings of $10.6 million.  The improved segment earnings anticipate higher ECU netbacks and chlorine and caustic soda shipment volumes.  The Chlor Alkali Products’ operating rate in the first quarter of 2011 is forecast to be in the 80% range, which is comparable to the fourth quarter of 2010 level of 80% and an improvement from the first quarter of 2010 level of 75%.
 
    The fourth quarter of 2010 ECU netback was $515.  Business conditions improved throughout 2010, and Olin’s quarterly chlor alkali operating rates improved year-over-year by at least 10% peaking in the third quarter of 2010 with a 91% operating rate during the summer demand season.  A significant portion of the North American chlor alkali demand improvement came from exports of products made from chlorine, driven by the energy advantage North America enjoys by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout the year.  During the third quarter of 2010, three caustic soda price increases were announced totaling $135 per ton.  We believe that a portion of the $135 per ton caustic soda price increases announced during the third quarter of 2010 will be realized.  We anticipate some additional benefits from these price increases and from contracts that re-set on an annual basis to be realized in the first half of 2011.  Additionally, we announced a $40 per ton caustic soda price increase in January 2011.  While the success of this $40 per ton caustic soda price increase is not yet known, some portion of the benefits of this price increase, if realized, would impact our system beginning in the second quarter of 2011.

Bleach volumes in 2010 increased approximately 18% compared to 2009 levels as we began to see the benefits of our initiatives to ship bleach by rail.  We have now experienced nine consecutive quarters, on a year-over-year basis, of volume growth in bleach shipments at a rate in excess of 10%.  We are currently forecasting an additional 15% to 20% growth in bleach shipments in 2011 compared to 2010.  During 2010, approximately 9% of our effective chlor alkali capacity was consumed making bleach.  The continuation of these initiatives and the start-up of our first low salt, high strength bleach facility in McIntosh, AL, which is expected during the third quarter of 2011, will drive future growth.

Winchester first quarter 2011 segment earnings are expected to be higher than the fourth quarter of 2010 segment earnings of $3.6 million but lower than the first quarter of 2010 segment earnings of $19.5 million.  Higher commodity costs and lower levels of commercial demand than the prior year first quarter are expected to negatively impact first quarter of 2011 segment earnings.  The higher than normal levels of commercial demand that began in the fourth quarter of 2008 continued through the second quarter of 2010.  However, beginning with the third quarter of 2010, Winchester began to experience a decline in commercial demand from the 2009 levels.

Winchester’s fourth quarter 2010 acquired cost of all commodity metals increased compared to fourth quarter 2009 levels.  The price of copper increased 21%, the price of lead 7% and the price of zinc increased 18%.  Winchester utilizes approximately three times as much lead as copper and three times as much copper as zinc.  As we look forward into 2011, the price of copper will likely present a significant challenge.  During the second half of 2010, there has been a steady rise in the average monthly price of copper from $2.94 per pound in June to $4.17 per pound in December, with daily spot prices in December approaching $4.50 per pound.  During January, copper prices have continued at the recent elevated levels and averaged $4.35 per pound.


 
 
 
36

 
 

On November 3, 2010, we announced that we had made the decision to relocate Winchester centerfire ammunition operations from East Alton, IL to Oxford, MS.  This relocation, when completed, is forecast to reduce Winchester’s annual operating costs by approximately $30 million.  We also expect this relocation project to reduce Winchester’s 2011 segment earnings before meaningful savings are realized beginning in 2013.  The reduction to Winchester 2011 segment income for this relocation project is estimated to be $4 million to $5 million.

Without the recoveries of environmental costs incurred and expensed in prior periods, we anticipate that 2011 charges for environmental investigatory and remedial activities will be in the $25 million range, which is comparable with the average environmental cost for the last 5 years, and higher than the 2010 level of $16.3 million.  We do believe that there are additional opportunities to recover environmental costs incurred and expensed in prior periods, but the timing and the amount of any additional recoveries are uncertain.

We expect defined benefit pension plan income in 2011 to be similar to the 2010 level.  Based on the December 31, 2010 funding status, we will not be required to make any cash contributions to our domestic defined benefit pension plan in 2011.  We do have a small Canadian defined benefit pension plan to which we made $9.8 million and $4.5 million of cash contributions in 2010 and 2009, respectively, and we anticipate cash contributions of less than $5 million in 2011.

We believe the 2011 effective tax rate will be in the 36% to 37% range.

In 2011, we expect capital spending to be in the $230 million to $250 million range, which includes spending for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology and the relocation of our Winchester centerfire ammunition manufacturing operations.  The capital spending for the Winchester relocation will be partially financed by approximately $31 million of grants provided by the State of Mississippi and local governments.  Also, we expect to continue capital spending for the low salt, high strength bleach facility located at our McIntosh, AL site, which is expected to be completed in 2011.  We expect 2011 depreciation expense to be approximately $90 million.

ENVIRONMENTAL MATTERS
   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
Cash outlays (receipts):
 
($ in millions)
 
Remedial and investigatory spending (charged to reserve)
 
$
15.7
   
$
19.0
   
$
23.7
 
Recoveries from third parties
   
(7.2
)
   
(82.1
)
   
 
Capital spending
   
1.3
     
2.9
     
5.2
 
Plant operations (charged to cost of goods sold)
   
24.1
     
24.4
     
22.8
 
Total cash outlays (receipts)
 
$
33.9
   
$
(35.8
)
 
$
51.7
 

Our liabilities for future environmental expenditures were as follows:
     
December 31,
 
   
2010
   
2009
   
2008
 
   
($ in millions)
 
Beginning balance
 
$
166.1
   
$
158.9
   
$
155.6
 
    Charges to income
   
16.3
     
24.1
     
27.7
 
Remedial and investigatory spending
   
(15.7
)
   
(19.0
)
   
(23.7
)
Pioneer acquired liabilities
   
     
     
2.1
 
Currency translation adjustments
   
0.9
     
2.1
     
(2.8
)
Ending balance
 
$
167.6
   
$
166.1
   
$
158.9
 


 
 
 
37

 
 

Total environmental-related cash outlays in 2010 increased compared to 2009 due to the lower recoveries from third parties of costs incurred and expensed in prior periods.  Remedial and investigatory spending was lower in 2010 than 2009 due to completing a remedial action at a site in 2009 and principally completing an investigation at a former manufacturing site in 2009.  Remedial and investigatory spending was lower in 2009 than 2008 due to reduced spending at two former Pioneer sites and principally completing an investigation at a former manufacturing site in 2009 partially offset by spending in 2009 to complete remedial action at a site.  Total environmental-related cash outlays for 2011 are estimated to be approximately $55 million, of which $28 million is expected to be spent on investigatory and remedial efforts, $3 million on capital projects and $24 million on normal plant operations.  Remedial and investigatory spending is anticipated to be higher in 2011 than 2010 due to the implementation of remedial actions at two former manufacturing sites and one former waste disposal site.  Historically, we have funded our environmental capital expenditures through cash flow from operations and expect to do so in the future.

Cash outlays for remedial and investigatory activities associated with former waste sites and past operations were not charged to income but instead were charged to reserves established for such costs identified and expensed to income in prior years.  Cash outlays for normal plant operations for the disposal of waste and the operation and maintenance of pollution control equipment and facilities to ensure compliance with mandated and voluntarily imposed environmental quality standards were charged to income.

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 plant 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.

We are party to various governmental and private environmental actions associated with past manufacturing facilities and former waste disposal sites.  Associated costs of investigatory and remedial activities are provided for in accordance with generally accepted accounting principles governing probability and the ability to reasonably estimate future costs.  Our ability to estimate future costs depends on whether our investigatory and remedial activities are in preliminary or advanced stages.  With respect to unasserted claims, we accrue liabilities for costs that, in our experience, we may incur to protect our interests against those unasserted claims.  Our accrued liabilities for unasserted claims amounted to $3.4 million at December 31, 2010.  With respect to asserted claims, we accrue liabilities based on remedial investigation, feasibility study, remedial action and operation, maintenance and monitoring (OM&M) expenses that, in our experience, we may incur in connection with the asserted claims.  Required site OM&M expenses are estimated and accrued in their entirety for required periods not exceeding 30 years, which reasonably approximates the typical duration of long-term site OM&M.  Charges or credits to income for investigatory and remedial efforts were material to operating results in 2010, 2009 and 2008 and may be material to operating results in future years.

Environmental provisions charged (credited) to income, which are included in cost of goods sold, were as follows:

   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
   
($ in millions)
 
Charges to income
 
$
16.3
   
$
24.1
   
$
27.7
 
Recoveries from third parties of costs incurred and expensed in prior periods
   
(7.2
)
   
(82.1
)
   
 
Total environmental expense (income)
 
$
9.1
   
$
(58.0
)
 
$
27.7
 


 
 
 
38

 
 

These charges relate primarily to remedial and investigatory activities associated with past manufacturing operations and former waste disposal sites.

Our total estimated environmental liability at the end of 2010, was attributable to 68 sites, 17 of which were USEPA National Priority List (NPL) sites.  Ten sites accounted for 78% of our environmental liability and, of the remaining 58 sites, no one site accounted for more than 3% of our environmental liability.  At one of these ten sites, a remedial action plan is being implemented.  At five of the ten sites, part of the site is subject to a remedial investigation and another part is in the long-term OM&M stage.  At one of these ten sites, a remedial investigation is being performed.  At one site, part of the site is subject to a remedial action plan and part of the site to long-term OM&M.  The two remaining sites are in long-term OM&M.  All ten sites are either associated with past manufacturing operations or former waste disposal sites.  None of the ten largest sites represents more than 20% of the liabilities reserved on our consolidated balance sheet at December 31, 2010 for future environmental expenditures.

Our consolidated balance sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $167.6 million at December 31, 2010, and $166.1 million at December 31, 2009, of which $139.6 million and $131.1 million, respectively, were classified as other noncurrent liabilities.  Our environmental liability amounts did not take into account any discounting of future expenditures or any consideration of insurance recoveries or advances in technology.  These liabilities are reassessed periodically to determine if environmental circumstances have changed and/or remediation efforts and our estimate of related costs have changed.  As a result of these reassessments, future charges to income may be made for additional liabilities.  Of the $167.6 million included on our consolidated balance sheet at December 31, 2010 for future environmental expenditures, we currently expect to utilize $99.5 million of the reserve for future environmental expenditures over the next 5 years, $20.8 million for expenditures 6 to 10 years in the future, and $47.3 million for expenditures beyond 10 years in the future.  These estimates are subject to a number of risks and uncertainties, as described in Item 1A “Risk Factors—Environmental Costs.”

Annual environmental-related cash outlays for site investigation and remediation, capital projects, and normal plant operations are expected to range between $50 million to $70 million over the next several years, $20 million to $40 million of which is for investigatory and remedial efforts, which are expected to be charged against reserves recorded on our balance sheet.  While we do not anticipate a material increase in the projected annual level of our environmental-related cash outlays, there is always the possibility that such an increase may occur in the future in view of the uncertainties associated with environmental exposures.  Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, changes in regulatory authorities, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other PRPs, and our ability to obtain contributions from other parties and the lengthy time periods over which site remediation occurs.  It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations.  At December 31, 2010, we estimate it is reasonably possible that we may have additional contingent environmental liabilities of $50 million in addition to the amounts for which we have already recorded as a reserve.

LEGAL MATTERS AND CONTINGENCIES

We, and our subsidiaries, are defendants in various legal actions (including proceedings based on alleged exposures to asbestos) incidental to our past and current business activities.  We describe some of these matters in “Item 3—Legal Proceedings.”  At December 31, 2010 and 2009, our consolidated balance sheets included liabilities for these legal actions of $18.1 million and $15.8 million, respectively.  These liabilities do not include costs associated with legal representation.  Based on our analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect our financial statements or results of operations in the near term.


 
 
 
39

 
 

During the ordinary course of our business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible gain contingency.  In certain instances such as environmental projects, we are responsible for managing the cleanup and remediation of an environmental site.  There exists the possibility of recovering a portion of these costs from other parties.  We account for gain contingencies in accordance with the provisions of ASC 450 “Contingencies” (ASC 450), formerly SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), and therefore do not record gain contingencies and recognize income until it is earned and realizable.

LIQUIDITY, INVESTMENT ACTIVITY AND OTHER FINANCIAL DATA

Cash Flow Data
   
Years ended December 31,
 
   
2010
   
2009
   
2008
 
Provided by (used for)
 
($ in millions)
 
Net operating activities
 
$
115.5
   
$
200.2
   
$
115.6
 
Capital expenditures
   
(85.3
)
   
(137.9
)
   
(180.3
)
Increase in restricted cash, net
   
(102.0
)
   
     
 
Net investing activities
   
(159.7
)
   
(87.7
)
   
(156.0
)
Long-term debt borrowings (repayments), net
   
96.3
     
150.3
     
(11.3
)
Net financing activities
   
44.3
     
99.5
     
(19.1
)

Operating Activities

For 2010, cash provided by operating activities decreased by $84.7 million from 2009 primarily due to lower earnings partially offset by a smaller increase in working capital.  In 2010, working capital increased $9.7 million compared with an increase of $22.6 million in 2009.  Our days sales outstanding decreased by approximately two days compared to prior year.  Accounts payable and accrued liabilities increased from December 31, 2009 by $14.1 million.  Inventories increased from December 31, 2009 by $31.8 million, primarily due to higher commodity costs and a return to a more normal level of inventory at Winchester.  The 2010 cash from operations was also affected by a $27.0 million decrease in cash tax payments.  In 2010, we made cash contributions to our foreign defined benefit pension plan of $9.8 million.

For 2009, cash provided by operating activities increased by $84.6 million from 2008 primarily due to a smaller increase in working capital than the prior year.  In 2009, working capital increased $22.6 million compared with an increase of $97.8 million in 2008.  Receivables decreased from December 31, 2008 by $29.7 million, primarily due to lower sales.  Our days sales outstanding was consistent with 2008.  Accounts payable and accrued liabilities decreased from December 31, 2008 by $43.5 million, primarily as a result of the timing of payments and a $20.6 million payment for the final settlement of working capital on the sale of the Metals business, which was consistent with the estimated working capital adjustment we anticipated from the transaction.  The 2009 cash from operations was also affected by a $57.9 million decrease in cash tax payments.  In 2009, we made cash contributions to our foreign defined benefit pension plan of $4.5 million.

Capital Expenditures

Capital spending was $85.3 million, $137.9 million, and $180.3 million in 2010, 2009 and 2008, respectively.  The decreased capital spending in 2010 was primarily due to the St. Gabriel, LA conversion and expansion project, which was completed in the fourth quarter of 2009.  Capital spending in 2010 included bleach manufacturing and bleach shipping by railroad expansion projects at three of our Chlor Alkali facilities.  We initiated construction of a low salt, high strength bleach facility that will double the concentration of the bleach we manufacture and should reduce transportation costs.  Capital spending for this project, which is expected to be in the $17 million to $20 million range, began in 2010 and is expected to be completed in 2011.  Capital spending in 2009 included $69.6 million for the St. Gabriel, LA facility conversion and expansion project and also increased investments in our bleach operations.  The increase in 2008 was primarily due to spending of $87.2 million for the St. Gabriel, LA facility conversion and expansion project and increased spending for a major maintenance capital project at our McIntosh, AL facility.  Capital spending was 100%, 196%, and 265% of depreciation in 2010, 2009 and 2008, respectively.