final10k2011.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, 2011

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, 2011, the aggregate market value of registrant’s common stock, par value $1 per share, held by non-affiliates of registrant was approximately $1,805,764,093 based on the closing sale price as reported on the New York Stock Exchange.

As of January 31, 2012, 80,058,320 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 2012
 
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, hydrochloric acid, hydrogen, bleach products and potassium hydroxide, which represent 71% of 2011 sales.  Winchester products, which represent 29% of 2011 sales, include sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.  See our discussion of our segment disclosures contained in Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

On February 28, 2011, we acquired PolyOne Corporation’s (PolyOne) 50% interest in the SunBelt Chlor Alkali Partnership, which we refer to as SunBelt.  The SunBelt chlor alkali plant, which is located within our McIntosh, AL facility, has approximately 350,000 tons of membrane technology capacity.  Previously, we had a 50% ownership interest in SunBelt, which was accounted for using the equity method of accounting.  Accordingly, prior to the acquisition, we included only our share of SunBelt results in earnings of non-consolidated affiliates.  Since the date of acquisition, SunBelt’s results are no longer included in earnings of non-consolidated affiliates but are consolidated in our accompanying financial statements.

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 from 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 2011, our Chief Executive Officer executed the annual Section 303A.12(a) CEO Certification required by the New York Stock Exchange (NYSE), certifying that he was not aware of any violation of the NYSE’s corporate governance listing standards by us.  Additionally, our Chief Executive Officer and Chief Financial Officer executed the required Sarbanes-Oxley Act of 2002 (SOX) Sections 302 and 906 certifications relating to this Annual Report on Form 10-K, which are filed with the SEC as exhibits to this Annual Report on Form 10-K.

PRODUCTS, SERVICES AND STRATEGIES

Chlor Alkali Products

Products and Services

We have been involved in the U.S. chlor alkali industry for more than 100 years and are a major participant in the North American chlor alkali market.  Chlorine, 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 and 0.03 tons of hydrogen.  The industry refers to this as an Electrochemical Unit or ECU.  With a demonstrated capacity as of the end of 2011 of 2.2 million ECUs per year, 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 58% of our caustic soda production is high purity membrane and rayon grade, which, according to CMAI data, normally commands a premium selling price in the market.  According to data from CMAI, we are the largest North American producer of industrial bleach, which is manufactured using both chlorine and caustic soda.


 
2

 

Our manufacturing facilities in Augusta, GA; McIntosh, AL; Charleston, TN; St. Gabriel, LA; Henderson, NV; Becancour, Quebec; and a portion of our facility in Niagara Falls, NY are ISO 9002 certified.  In addition, Augusta, GA; McIntosh, AL; Charleston, TN; St. Gabriel, LA; Henderson, NV; 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; St. Gabriel, LA; Henderson, NV; 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 17% of our chlorine produced 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.  Caustic soda is used in the delignification and bleaching portions 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 $560, $475 and $520 per ECU in 2011, 2010 and 2009, respectively.

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.


 
3

 

Our 2010 ECU netbacks of approximately $475 were 9% lower than the 2009 netbacks of approximately $520; however, the pricing trend was positive throughout 2010 as ECU netbacks increased sequentially from the low level of approximately $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was approximately $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year reaching 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 the North American chemical producers enjoy by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout 2010.  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 began realizing the benefits from these price increases and from contracts that re-set on an annual basis in the first half of 2011.

Our 2011 ECU netbacks of approximately $560 were 18% higher than the 2010 netbacks of approximately $475.  The 2011 SunBelt ECU netback was approximately $605.  In the first quarter of 2011, three caustic soda price increases were announced totaling $150 per ton.  In March 2011, we also announced a $60 per ton chlorine price increase.  In the third quarter of 2011, an additional caustic soda price increase was announced for $65 per ton, which replaced a late second quarter announced caustic soda price increase of $25 per ton.  Finally, in the fourth quarter of 2011, an additional caustic soda price increase was announced for $80 per ton.  The fourth quarter ECU netback was approximately $580, which was the first decline in price since the low point in our system in the third quarter of 2009.   ECU netbacks in the fourth quarter declined slightly from the third quarter levels of approximately $590 as chlorine prices weakened, driven by a reduced level of chlorine demand, which more than offset increases in caustic soda prices.  ECU netbacks in the first quarter of 2012 are forecast to decline slightly from the fourth quarter of 2011 as we expect the fourth quarter chlorine and caustic soda pricing trends to continue into the first quarter of 2012.  While the success of the third quarter 2011 $65 per ton caustic soda price increase is not yet known, the majority of the benefits of this price increase, if realized, would impact our system in the first quarter of 2012.  While the success of the fourth quarter 2011 $80 per ton caustic soda price increase is not yet known, we believe that it is unlikely that any benefit of this price increase will be realized in the first quarter of 2012.

Electricity and salt are the major purchased raw materials for our Chlor Alkali Products segment.  Raw materials represent approximately 47% 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 facility, 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, in December 2010, 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 ECUs or 7% of our demonstrated capacity.  We currently expect to complete the conversion and reconfiguration by the end of 2012.

We also manufacture and sell other chlor alkali-related products.  These products include chemically processed salt, hydrochloric acid, sodium hypochlorite (bleach), hydrogen, and potassium hydroxide.  We refer to these other chlor alkali-related products as co-products.  Sales of co-products represented approximately 30% of Chlor Alkali Products’ sales in 2011.  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.  In 2010, we initiated a capital project to construct a low salt, high strength bleach facility located at our McIntosh, AL chlor alkali site and in 2011 we initiated two additional low salt, high strength bleach facilities at our Niagara Falls, NY and Henderson, NV sites.  We expect to complete the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.  The two remaining low salt, high strength bleach facilities are expected to be completed by the fourth quarter of 2012.  These three new facilities will increase total bleach manufacturing capacity by an additional 50% over the 2011 capacity.  These low salt, high strength bleach facilities will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.


 
4

 

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

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 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 at our SunBelt and St. Gabriel, LA facilities.


 
5

 

Winchester

Products and Services

In 2011, Winchester was in its 145th year of operation and its 81st 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.

During 2011, Winchester was awarded the U.S. Army’s “Second Source” ammunition contract, which has the potential to generate $300 million of sales over five years.  The contract provides for the production of .50 caliber, 5.56 millimeter, and 7.62 millimeter ammunition.  In 2011, the U.S. Army also awarded Winchester a new five-year contract for 9mm NATO ammunition, which has the potential to generate $80 million of sales over the five years.

In January 2012, Winchester announced it had formed a joint venture named U.S. Munitions with BAE Systems to submit a proposal for the operation and maintenance of the Lake City Army Ammunition Plant.  The Lake City Army Ammunition Plant is the U.S. Army’s primary manufacturing location for small caliber ammunition.  We believe U.S. Munitions provides the best opportunity for Winchester to participate in the Lake City competition.  It is expected that a decision will be made during the fourth quarter of 2012 and that after a one-year transition period, the selected contractor will assume responsibility for the plant on October 1, 2013.  This represents a long-term opportunity for Winchester.

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 facilities in Oxford, MS and Australia achieved ISO 9001:2008 recertification in 2011.

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 was recognized by wholesaler Big Rock Sports as its 2009 “Hunting/Shooting Vendor of the Year.”

Winchester has consistently developed industry-leading ammunition.  In 2011, Winchester ammunition products received numerous industry recognitions, including: Winchester® Blind Side® waterfowl loads received the 2011 “Best of the Best” award from Field & Stream magazine, were selected as “Top Choice” for duck hunting in Field & Stream’s “Ultimate Shotshell Guide,” were named “Editor’s Choice” as the top overall ammo in Outdoor Life’s 2011 “Ammo of the Year” awards, and were recommended to ammunition retailers as “a best bet to make the register ring” by the editors of SHOT Business.  In addition, Winchester® Power-Core 95/5 Lead-Free Big Game Cartridges received the 2011 “Best of the Best” award from Field & Stream magazine, the Winchester® .17HMR Varmint Lead-Free round was awarded Top Rimfire Ammo in Outdoor Life’s 2011 “Ammo of the Year” awards, and Field & Stream’s 2011 “Ultimate Shotshell Guide” named Winchester® AA® Heavy Target Loads the “Top Choice” for upland bird hunting.

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 the Winchester centerfire pistol and rifle ammunition manufacturing operations from East Alton, IL to Oxford, MS.  In October 2011, we opened the new centerfire production facility in Oxford, MS and the pistol ammunition manufacturing equipment is in the process of being relocated and started up in Oxford, MS.  During 2011, Winchester began manufacturing pistol ammunition in 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 2011, no single customer accounted for more than 7% 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 2011.  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.


 
7

 

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 $136.8 million and $178.1 million as of January 31, 2012 and 2011, respectively.  The backlog orders are in our Winchester business.  Backlog is comprised of all open customer orders not yet shipped.  Approximately 75% of contracted backlog as of January 31, 2012 is expected to be filled during 2012.

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 16 million tons of chlorine and 17 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 and the integrated producers of chlorine 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.

EMPLOYEES

As of December 31, 2011, we had approximately 3,800 employees, with 3,500 working in the United States and 300 working in foreign countries, primarily Canada.  Various labor unions represent a majority of our hourly-paid employees for collective bargaining purposes.

The following labor contract is scheduled to expire in 2012:

Location
 
Number of Employees
 
Expiration Date
Becancour (Chlor Alkali)
 
130
 
April 2012

While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude this labor contract 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.


 
8

 

RESEARCH ACTIVITIES; PATENTS

Our research activities are conducted on a product-group basis at a number of facilities.  Company-sponsored research expenditures were $2.7 million in 2011, $2.1 million in 2010 and $2.2 million in 2009.

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.

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.


 
9

 

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.

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 1.8 million 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 three years.  In 2010, we announced plans to convert our Charleston, TN facility from 260,000 tons of mercury cell capacity to 200,000 tons of membrane capacity and our intention to reconfigure our Augusta, GA facility to discontinue chlor alkali manufacturing.  We currently expect to complete the conversion and configuration by the end of 2012.  Together, these actions will reduce our overall chlor alkali production capacity by 160,000 ECUs.  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 $18 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 possible 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 products 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.


 
10

 

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 Item 7“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Environmental Matters.”

Litigation and Claims—We are subject to litigation and other claims, which could cause us to incur significant expenses.

We are a defendant in a number of pending legal proceedings relating to our present and former operations.  These include proceedings alleging injurious exposure of plaintiffs to various chemicals and other substances (including proceedings based on alleged exposures to asbestos).  Frequently, such proceedings involve claims made by numerous plaintiffs against many defendants.  However, because of the inherent uncertainties of litigation, we are unable to predict the outcome of these proceedings and therefore cannot determine whether the financial impact, if any, will be material to our financial position or results of operations.

Security and Chemicals Transportation—New regulations on the transportation of hazardous chemicals and/or the security of chemical manufacturing facilities and public policy changes related to transportation safety could result in significantly higher operating costs.

The chemical industry, including the chlor alkali industry, has proactively responded to the issues related to national security and environmental concerns by starting new initiatives relating to the security of chemicals industry facilities and the transportation of hazardous chemicals in the United States.  Government at the local, state, and federal levels 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.

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.

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 or repay 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.


 
11

 

Information Security—A failure of our information technology systems, or an interruption in their operation, could have a material adverse effect on our business, financial condition or results of operations.

Our operations are dependent on our ability to protect our information systems, computer equipment and information databases from systems failures.  We rely on our information technology systems generally to manage the day-to-day operation of our business, operate elements of our chlor alkali manufacturing facilities, manage relationships with our customers, fulfill customer orders, and maintain our financial and accounting records.  Failures of our information technology systems could be caused by internal or external events, such as incursions by intruders or hackers, computer viruses, failures in hardware or software, power fluctuations or cyber-attacks.  The failure of our information technology systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, increased costs or loss of important information, any of which could have a material adverse effect on our business, financial condition or results of operations.  We have technology and information security processes and disaster recovery plans in place to mitigate our risk to these vulnerabilities.  However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.

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.

For example, our Chlor Alkali product transportation costs, particularly railroad shipment costs, are a significant portion of our cost of sales, and have been increasing over the past several years.  If the cost increases continue, and we are unable to control those costs or pass the increased costs on to customers, our profitability in our Chlor Alkali business would be negatively affected.  Similarly, costs of commodity metals and other materials used in our Winchester business, such as copper and lead, can vary.  If we experience significant increases in these costs and are unable to raise our prices to offset the higher costs, the profitability in our Winchester business would be negatively affected.

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.

Our senior revolving credit facility will expire in October 2012.  We cannot be assured that we will be able to refinance this facility or that we will be able to refinance the facility with similar terms and conditions, including financial maintenance covenants.  Our senior revolving credit facility contains a $110 million letter of credit subfacility, which is used to support certain long-term debt and certain workers compensation insurance policies.

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.


 
12

 

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 plans may result in higher pension costs and the need to fund the pension plans 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 $29.0 million ($46.8 million pretax) to shareholders’ equity as of December 31, 2011 for our pension and other postretirement plans.  This charge reflected a 40-basis point decrease in the plans’ discount rate and an unfavorable actuarial assumption change related to mortality tables, partially offset by the favorable performance on plan assets during 2011.  In 2010, 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.  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 2013.  We do have a small Canadian defined benefit pension plan to which we made $0.9 million and $9.8 million of cash contributions in 2011 and 2010, respectively, and we anticipate less than $5 million of cash contributions in 2012.  At December 31, 2011, the market value of assets in our qualified defined benefit pension plans of $1,906.9 million exceeded the projected benefit obligation by $19.2 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 plans 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 2011 defined benefit pension plans income by approximately $16.3 million.

Holding all other assumptions constant, a 50-basis point decrease in the discount rate used to calculate pension income for 2011 and the projected benefit obligation as of December 31, 2011 would have decreased pension income by $0.5 million and increased the projected benefit obligation by $97.0 million.  A 50-basis point increase in the discount rate used to calculate pension income for 2011 and the projected benefit obligation as of December 31, 2011 would have increased pension income by $1.9 million and decreased the projected benefit obligation by $99.0 million.

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, 2011, we had $536.4 million of indebtedness outstanding, including $2.2 million representing the fair value related to $80.8 million of interest rate swaps and $10.5 million representing the unrecognized gain related to $125.0 million of interest rate swaps at December 31, 2011.  This outstanding indebtedness does not include our $240.0 million senior revolving credit facility of which we had $231.5 million available as of December 31, 2011 because we had issued $8.5 million of letters of credit.  As of December 31, 2011, our indebtedness represented 35.2% of our total capitalization.  At December 31, 2011, $12.2 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.


 
13

 

Labor Matters—We cannot assure you that we can conclude future labor contracts or any other labor agreements without work stoppages.
 
Various labor unions represent a majority of our hourly-paid employees for collective bargaining purposes.  The following labor contract is scheduled to expire in 2012:

Location
 
Number of Employees
 
Expiration Date
Becancour (Chlor Alkali)
 
130
 
April 2012

While we believe our relations with our employees and their various representatives are generally satisfactory, we cannot assure that we can conclude this labor contract 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.

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 Item 7“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.”

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 entered 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.”

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.”


 
14

 

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, 2011 and 2010, our consolidated balance sheets included liabilities for these legal actions of $16.4 million and $18.1 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 position or results of operations in the near term.
 
Item 4.  REMOVED AND RESERVED

Executive Officers of the Registrant as of February 24, 2012

Name and Age
 
Office
 
Served as an Olin Officer Since
Joseph D. Rupp (61)
 
Chairman, President and Chief Executive Officer
 
1996
Frank W. Chirumbole (53)
 
President, Chlor Alkali Products
 
2011
Stephen C. Curley (60)
 
Vice President and Treasurer
 
2005
Dolores J. Ennico (59)
 
Vice President, Human Resources
 
2009
John E. Fischer (56)
 
Senior Vice President and Chief Financial Officer
 
2004
G. Bruce Greer, Jr. (51)
 
Vice President, Strategic Planning and Information Technology
 
2005
John L. McIntosh (57)
 
Senior Vice President, Operations
 
1999
Thomas J. O’Keefe (53)
 
President, Winchester
 
2011
George H. Pain (61)
 
Senior Vice President, General Counsel and Secretary
 
2002
Todd A. Slater (48)
 
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 Messrs. Chirumbole and O’Keefe and Ms. Ennico, have served as executive officers for more than five years.

Frank W. Chirumbole was appointed President, Chlor Alkali Products effective October 1, 2010.  From 2009 until September 2010, he served as Vice President, General Manager – Bleach; from 2007 to 2009 he served as Vice President, Supply Management; and from 2001 to 2007 he served as Vice President, Manufacturing and Engineering, all in the Chlor Alkali Products Division.

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.

Thomas J. O’Keefe was appointed President, Winchester effective January 1, 2011.  From 2008 to 2010, he served as Vice President, Operations and Planning and from 2006 to 2008 he was Vice President, Manufacturing Operations, in each case, in the Winchester Division.  From 2001 to 2006, he was Vice President, Manufacturing and Engineering for Olin’s former Brass Division.


 
15

 

PART II

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

As of January 31, 2012, we had 4,338 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 2011 and 2010 are listed below.  A dividend of $0.20 per common share was paid during each of the four quarters in 2011 and 2010.

2011
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
Market price of common stock per New York Stock Exchange composite transactions
                               
High
 
$
23.04
   
$
27.16
   
$
24.09
   
$
21.75
 
Low
   
17.97
     
20.60
     
17.64
     
16.11
 
                                 
2010
                       
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
 

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, 2011
 
N/A
 
     
November 1-30, 2011
113,971
$
17.91
 
113,971
     
December 1-31, 2011
 
N/A
 
     
Total
           
4,761,483
(1)

(1)
On July 21, 2011, we announced a share repurchase program approved by the board of directors for the purchase of up to 5 million shares of common stock that will terminate on July 21, 2014.  Through December 31, 2011, 238,517 shares had been repurchased, and 4,761,483 shares remained available for purchase under that program.


 
16

 

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)
   
4,702,958
(3)
 
$
17.73
(3)
   
2,905,735
 
Equity compensation plans not approved by security holders
   
N/A
     
N/A
     
N/A
 
                         
Total
   
4,702,958
   
$
17.73
(3)
   
2,905,735
 

(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, 2011:

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
    66,536    
$
23.78
 
3.1 years

(3)      Includes:

 
3,698,334 shares issuable upon exercise of options with a weighted average exercise price of $17.73, and a weighted average remaining term of 6.2 years,

 
256,130 shares issuable under restricted stock unit grants, with a weighted average remaining term of 0.8 years,

 
414,750 shares issuable in connection with outstanding performance share awards, with a weighted average term of 1.0 years remaining in the performance measurement period, and

 
333,744 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.


 
17

 

Performance Graph

This graph compares the total shareholder return on our common stock with the cumulative total return of the Standard & Poor’s 1000 Index (the “S&P 1000”) and a customized peer group of six companies comprised of: Alliant Techsystems, The Dow Chemical Company, Georgia Gulf Corporation, Occidental Petroleum Corporation, PPG Industries, Inc. and Westlake Chemical Corporation.

Stock Performance Graph

Data is for the five-year period from December 31, 2006 through December 31, 2011.  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.


 
18

 

Item 6.  SELECTED FINANCIAL DATA

TEN-YEAR SUMMARY

   
2011
   
2010
   
2009
   
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
 
Operations
 
($ and shares in millions, except per share data)
 
Sales
 
$
1,961
   
$
1,586
   
$
1,532
   
$
1,765
   
$
1,277
   
$
1,040
   
$
955
   
$
766
   
$
703
   
$
604
 
Cost of goods sold
   
1,574
     
1,350
     
1,223
     
1,377
     
1,035
     
792
     
682
     
639
     
588
     
551
 
Selling and administration
   
161
     
134
     
135
     
137
     
129
     
129
     
128
     
90
     
78
     
70
 
Loss on restructuring of businesses
   
(11
)
   
(34
)
   
     
     
     
     
     
(10
)
   
     
 
Other operating income
   
9
     
2
     
9
     
1
     
2
     
7
     
9
     
6
     
     
 
Earnings (loss) of non-consolidated affiliates
   
10
     
30
     
38
     
39
     
46
     
45
     
37
     
9
     
6
     
(8
)
Interest expense
   
30
     
25
     
12
     
13
     
22
     
20
     
20
     
20
     
20
     
26
 
Interest and other income (expense)
   
176
     
2
     
1
     
(20
)
   
12
     
12
     
20
     
5
     
3
     
4
 
Income (loss) before taxes from continuing operations
   
380
     
77
     
210
     
258
     
151
     
163
     
191
     
27
     
26
     
(47
)
Income tax provision (benefit)
   
138
     
12
     
74
     
100
     
50
     
39
     
74
     
8
     
8
     
(4
)
Income (loss) from continuing operations
   
242
     
65
     
136
     
158
     
101
     
124
     
117
     
19
     
18
     
(43
)
Discontinued operations, net
   
     
     
     
     
(110
)
   
26
     
21
     
36
     
(20
)
   
12
 
Cumulative effect of accounting changes, net
   
     
     
     
     
     
     
(5
)
   
     
(22
)
   
 
Net income (loss)
 
$
242
   
$
65
   
$
136
   
$
158
   
$
(9
)
 
$
150
   
$
133
   
$
55
   
$
(24
)
 
$
(31
)
Financial position
                                                                               
Cash and cash equivalents, short-term investments and restricted cash
 
$
357
   
$
561
   
$
459
   
$
247
   
$
333
   
$
276
   
$
304
   
$
147
   
$
190
   
$
136
 
Working capital, excluding cash and cash equivalents and short-term investments
   
76
     
33
     
91
     
24
     
(14
)
   
223
     
191
     
232
     
168
     
233
 
Property, plant and equipment, net
   
885
     
675
     
695
     
630
     
504
     
251
     
227
     
205
     
202
     
214
 
Total assets
   
2,450
     
2,049
     
1,932
     
1,720
     
1,731
     
1,642
     
1,802
     
1,621
     
1,448
     
1,426
 
Capitalization:
                                                                               
Short-term debt
   
12
     
78
     
     
     
10
     
2
     
1
     
52
     
27
     
2
 
Long-term debt
   
524
     
418
     
398
     
252
     
249
     
252
     
257
     
261
     
314
     
346
 
Shareholders’ equity
   
986
     
830
     
822
     
705
     
664
     
543
     
427
     
356
     
176
     
231
 
Total capitalization
 
$
1,522
   
$
1,326
   
$
1,220
   
$
957
   
$
923
   
$
797
   
$
685
   
$
669
   
$
517
   
$
579
 
Per share data
                                                                               
Basic:
                                                                               
Continuing operations
 
$
3.02
   
$
0.82
   
$
1.74
   
$
2.08
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
Discontinued operations, net
   
     
     
     
     
(1.48
)
   
0.36
     
0.30
     
0.53
     
(0.34
)
   
0.24
 
Accounting changes, net
   
     
     
     
     
     
     
(0.08
)
   
     
(0.38
)
   
 
Net income (loss)
 
$
3.02
   
$
0.82
   
$
1.74
   
$
2.08
   
$
(0.12
)
 
$
2.06
   
$
1.87
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
Diluted:
                                                                               
Continuing operations
 
$
2.99
   
$
0.81
   
$
1.73
   
$
2.07
   
$
1.36
   
$
1.70
   
$
1.65
   
$
0.27
   
$
0.30
   
$
(0.87
)
Discontinued operations, net
   
     
     
     
     
(1.48
)
   
0.36
     
0.29
     
0.53
     
(0.34
)
   
0.24
 
Accounting changes, net
   
     
     
     
     
     
     
(0.08
)
   
     
(0.38
)
   
 
Net income (loss)
 
$
2.99
   
$
0.81
   
$
1.73
   
$
2.07
   
$
(0.12
)
 
$
2.06
   
$
1.86
   
$
0.80
   
$
(0.42
)
 
$
(0.63
)
                                                                                 
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
   
27.16
     
22.39
     
19.79
     
30.39
     
24.53
     
22.65
     
25.35
     
22.99
     
20.53
     
22.60
 
Low
   
16.11
     
14.35
     
8.97
     
12.52
     
15.97
     
14.22
     
16.65
     
15.20
     
14.97
     
13.85
 
Year end
   
19.65
     
20.52
     
17.52
     
18.08
     
19.33
     
16.52
     
19.68
     
22.02
     
20.06
     
15.55
 
Other
                                                                               
Capital expenditures
 
$
201
   
$
85
   
$
138
   
$
180
   
$
76
   
$
62
   
$
63
   
$
38
   
$
33
   
$
24
 
Depreciation
   
97
     
85
     
70
     
68
     
47
     
38
     
36
     
33
     
40
     
51
 
Common dividends paid
   
64
     
63
     
63
     
61
     
59
     
58
     
57
     
56
     
47
     
39
 
Purchases of common stock
   
4
     
     
     
     
     
     
     
     
     
3
 
Current ratio
   
2.0
     
2.3
     
2.8
     
1.7
     
1.8
     
2.2
     
2.3
     
2.1
     
2.1
     
2.4
 
Total debt to total capitalization
   
35.2
%
   
37.4
%
   
32.6
%
   
26.4
%
   
28.1
%
   
31.8
%
   
37.7
%
   
46.8
%
   
65.9
%
   
60.0
%
Effective tax rate
   
36.3
%
   
15.7
%
   
35.4
%
   
38.8
%
   
33.1
%
   
24.2
%
   
38.4
%
   
29.6
%
   
30.8
%
   
n/a
 
Average common shares outstanding - diluted
   
80.8
     
79.9
     
78.3
     
76.1
     
74.3
     
72.8
     
71.6
     
68.4
     
58.3
     
49.4
 
Shareholders
   
4,400
     
4,600
     
4,900
     
5,100
     
5,300
     
5,700
     
6,100
     
6,400
     
6,800
     
7,200
 
Employees(1)
   
3,800
     
3,700
     
3,700
     
3,600
     
3,600
     
3,100
     
2,900
     
2,800
     
2,700
     
3,000
 

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.  Since February 28, 2011, our Selected Financial Data reflects the acquisition of the remaining 50% of SunBelt.

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

 
19

 

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.  Chlor Alkali operating rates are 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

2011 Year

SunBelt Acquisition

On February 28, 2011, we acquired PolyOne’s 50% interest in SunBelt for $132.3 million in cash plus the assumption of a PolyOne guarantee related to the SunBelt Notes.  With this acquisition, Olin now owns 100% of SunBelt.  The SunBelt chlor alkali plant, which is located within our McIntosh, AL facility, has approximately 350,000 tons of membrane technology capacity.  We also agreed to a three year earn out, which has no guaranteed minimum or maximum, based on the performance of SunBelt.  In conjunction with the acquisition, we consolidated the SunBelt Notes with a fair value of $87.3 million for the remaining principal balance of $85.3 million as of February 28, 2011.

Since February 28, 2011, our consolidated results included $170.5 million of SunBelt sales and $27.2 million of additional SunBelt pretax income ($38.7 million included in Chlor Alkali Products segment income; less $0.8 million of acquisition costs, $4.0 million of interest expense and $6.7 million of expense for our earn out liability) on the 50% interest we acquired.  Finally, the 2011 results included a one-time pretax, non-cash gain of $181.4 million associated with the remeasurement of our previously held 50% equity interest in SunBelt.  In conjunction with this remeasurement, a discrete deferred tax expense of $76.0 million was recorded.

Restructurings
 
    On December 9, 2010, our board of directors approved a plan to eliminate our use of mercury in the manufacture of chlor alkali products.  Under the plan, the 260,000 tons of mercury cell capacity at our Charleston, TN facility will be converted 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 to convert and reconfigure on several factors.  First, during 2009 and 2010 we had experienced a steady increase in the number of customers unwilling to accept our products manufactured using mercury cell technology.  Second, there was federal legislation 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 the conversion and reconfiguration by the end of 2012.
 
    On November 3, 2010, we announced that we had made the decision to relocate the Winchester centerfire pistol and rifle ammunition manufacturing 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.  In October 2011, we opened the new centerfire production facility in Oxford, MS and the pistol ammunition manufacturing equipment is in the process of being relocated and started up in Oxford, MS.  During 2011, approximately 12% of Winchester’s pistol ammunition was manufactured in Oxford, MS.  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.


 
20

 

Our total restructuring charges for 2011 and 2010 related to these actions were $10.7 million and $34.2 million, respectively.  The restructuring charges included write-off of equipment and facility costs, acceleration of asset retirement obligations, employee severance and related benefit costs, non-cash pension and other postretirement benefits curtailment charges, lease and other contract termination costs, employee relocation costs, and facility exit costs.  We expect to incur approximately $25 million of additional restructuring charges associated with these actions through the end of 2016.

Other Highlights

In 2011, Chlor Alkali Products’ segment income was $245.0 million, which more than doubled compared with the prior year.  Chlor Alkali Products’ segment income included $38.7 million of additional income from the acquisition of the remaining 50% interest in SunBelt.  Chlor Alkali Products’ also realized improved ECU prices for 2011 compared to the prior year.  Operating rates in Chlor Alkali Products for 2011 and 2010 were 80% and 82%, respectively.  The combination of planned multi-month outages by two chlorine customers and a weakening of chlorine demand negatively impacted shipment volumes in 2011.

Our 2011 ECU netbacks of approximately $560 were 18% higher than the 2010 netbacks of approximately $475.  The 2011 SunBelt ECU netback was approximately $605.  In the first quarter of 2011, three caustic soda price increases were announced totaling $150 per ton.  In March 2011, we also announced a $60 per ton chlorine price increase.  In the third quarter of 2011, an additional caustic soda price increase was announced for $65 per ton, which replaced a late second quarter announced caustic soda price increase of $25 per ton.  Finally, in the fourth quarter of 2011, an additional caustic soda price increase was announced for $80 per ton.  The fourth quarter ECU netback was approximately $580, which was the first decline in price since the low point in our system in the third quarter of 2009.   ECU netbacks in the fourth quarter declined slightly from the third quarter levels of approximately $590 as chlorine prices weakened, driven by a reduced level of chlorine demand, which more than offset increases in caustic soda prices.  ECU netbacks in the first quarter of 2012 are forecast to decline slightly from the fourth quarter of 2011 as we expect the fourth quarter chlorine and caustic soda pricing trends to continue into the first quarter of 2012.  While the success of the third quarter 2011 $65 per ton caustic soda price increase is not yet known, the majority of the benefits of this price increase, if realized, would impact our system in the first quarter of 2012.  While the success of the fourth quarter 2011 $80 per ton caustic soda price increase is not yet known, we believe that it is unlikely that any benefit of this price increase will be realized in the first quarter of 2012.

Winchester segment income was $37.9 million in 2011 compared to $63.0 million in 2010.  The Winchester segment income has declined from the surge levels of 2010 and 2009; however, 2011 represented the third most profitable year in at least the last two decades.  The decrease in 2011 compared to the prior year reflected the impact of higher commodity metals and other material costs, higher manufacturing costs and incremental costs associated with our ongoing relocation of the centerfire ammunition manufacturing operations to Oxford, MS, partially offset by higher selling prices.

Other operating income for 2011 included a gain of $3.7 million on the sale of a former manufacturing site and $1.9 million of insurance recoveries related to our Oxford, MS and St. Gabriel, LA facilities.

Income before taxes for 2011 and 2010 included $11.4 million and $7.2 million, respectively, of recoveries from third parties for environmental costs incurred and expensed in prior periods.

Income tax expense for 2011 included $7.3 million of adjustments associated with a remeasurement of deferred taxes due to an increase in state tax effective rates, the expiration of statutes of limitation in federal and state jurisdictions, and the finalization of our 2010 domestic and Canadian income tax returns.  Income tax expense for 2011 also included a discrete deferred tax expense of $76.0 million related to the tax effect of the gain recorded on the remeasurement of our previously held 50% equity interest in SunBelt.  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.

In December 2011, we repaid the $75.0 million 9.125% Senior Notes (2011 Notes) issued in 2001, and $12.2 million due under the annual requirements of the SunBelt Notes.  These were redeemed using cash.  Also during December 2011, we drew the remaining $36.0 million of variable rate Go Zone bonds that were issued in 2010.  The associated cash was classified as a restricted long-term asset.  On December 31, 2011, there was a $51.7 million restricted cash balance that is required to be used to fund capital projects in Alabama, Mississippi, and Tennessee.


 
21

 

Capital spending of $200.9 million for 2011 included $51.0 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations and $60.0 million for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology.  The capital spending for the ongoing Winchester relocation of $51.0 million was partially financed by $31.0 million of grants received by the State of Mississippi and local governments.  The full amounts of these grants were received in 2011.  The Charleston, TN mercury cell conversion is expected to be completed in the second half of 2012.  The 2011 capital spending also included approximately $20 million for the construction of low salt, high strength bleach facilities at our McIntosh, AL; Henderson, NV; and Niagara Falls, NY chlor alkali sites.  We expect to complete the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.  The two remaining low salt, high strength bleach facilities are expected to be completed by the fourth quarter of 2012.  These three new facilities will increase total bleach manufacturing capacity by an additional 50% over the 2011 capacity.  These low salt, high strength bleach facilities will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.

2010 Year

In 2010, Chlor Alkali Products’ segment income was $117.2 million, a decrease of 7% compared with 2009.  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 approximately $475 were 9% lower than the 2009 netbacks of approximately $520; however, the pricing trend was positive throughout 2010 as ECU netbacks increased sequentially from the low level of approximately $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was approximately $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year reaching 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 the North American chemical producers enjoy 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 began realizing the benefits from these price increases and from contracts that re-set on an annual basis in the first half of 2011.

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 2009 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 2009 levels.

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 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.

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 had 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 ongoing Winchester relocation.  Of the $117.0 million drawn from the Go Zone and Recovery Zone bonds as of December 31, 2010, $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 could request reimbursement of qualifying amounts used to fund the capital projects in Alabama, Mississippi and Tennessee.


 
22

 

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 for the years ended December 31, 2011 and 2010.

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 approximately $520 were 18% lower than the 2008 netbacks of approximately $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.

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.


 
23

 

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 2011, 2010, and 2009 were as follows:

   
2011
   
2010
   
2009
 
First quarter
 
$
525
   
$
440
   
$
765
 
Second quarter
   
550
     
470
     
585
 
Third quarter
   
590
     
465
     
375
 
Fourth quarter
   
580
     
515
     
425
 
Annual average
   
560
     
475
     
520
 

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 approximately $475 were 9% lower than the 2009 netbacks of approximately $520; however, the pricing trend was positive throughout 2010 as ECU netbacks increased sequentially from the low level of approximately $375 in the third quarter of 2009.  The fourth quarter of 2010 ECU netback was approximately $515.  As business conditions improved throughout 2010, our quarterly chlor alkali operating rates improved year-over-year reaching 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 the North American chemical producers enjoy by using natural gas as compared to crude oil.  With demand for both chlorine and caustic soda improving, price increases were announced throughout 2010.  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 began realizing the benefits from these price increases and from contracts that re-set on an annual basis in the first half of 2011.

Our 2011 ECU netbacks of approximately $560 were 18% higher than the 2010 netbacks of approximately $475.  The 2011 SunBelt ECU netback was approximately $605.  In the first quarter of 2011, three caustic soda price increases were announced totaling $150 per ton.  In March 2011, we also announced a $60 per ton chlorine price increase.  In the third quarter of 2011, an additional caustic soda price increase was announced for $65 per ton, which replaced a late second quarter announced caustic soda price increase of $25 per ton.  Finally, in the fourth quarter of 2011, an additional caustic soda price increase was announced for $80 per ton.  The fourth quarter ECU netback was approximately $580, which was the first decline in price since the low point in our system in the third quarter of 2009.  ECU netbacks in the fourth quarter declined slightly from the third quarter levels of approximately $590 as chlorine prices weakened, driven by a reduced level of chlorine demand, which more than offset increases in caustic soda prices.  ECU netbacks in the first quarter of 2012 are forecast to decline slightly from the fourth quarter of 2011 as we expect the fourth quarter chlorine and caustic soda pricing trends to continue into the first quarter of 2012.  While the success of the third quarter 2011 $65 per ton caustic soda price increase is not yet known, the majority of the benefits of this price increase, if realized, would impact our system in the first quarter of 2012.  While the success of the fourth quarter 2011 $80 per ton caustic soda price increase is not yet known, we believe that it is unlikely that any benefit of this price increase will be realized in the first quarter of 2012.


 
24

 

PENSION AND POSTRETIREMENT BENEFITS

Under ASC 715, formerly SFAS No. 158, we recorded an after-tax charge of $29.0 million ($46.8 million pretax) to shareholders’ equity as of December 31, 2011 for our pension and other postretirement plans.  This charge reflected a 40-basis point decrease in the plans’ discount rate and an unfavorable actuarial assumption change related to mortality tables, partially offset by the favorable performance on plan assets during 2011.  In 2010, 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.  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 2013.  We do have a small Canadian defined benefit pension plan to which we made $0.9 million and $9.8 million of cash contributions in 2011 and 2010, respectively, and we anticipate less than $5 million of cash contributions in 2012.  At December 31, 2011, the market value of assets in our qualified defined benefit pension plans of $1,906.9 million exceeded the projected benefit obligation by $19.2 million.

Components of net periodic benefit (income) costs were:
   
Years ended December 31,
 
   
2011
   
2010
   
2009
 
   
($ in millions)
 
Pension benefits
 
$
(22.5
)
 
$
(17.7
)
 
$
(16.7
)
Other postretirement benefits
   
7.8
     
7.3
     
7.3
 

In June 2011, we recorded a curtailment charge of $1.1 million related to the ratification of a new five and one half year Winchester, East Alton, IL union labor agreement.  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 our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  These curtailment charges were included in restructuring charges.

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,
 
   
2011
   
2010
   
2009
 
   
($ in millions, except per share data)
 
Sales
 
$
1,961.1
   
$
1,585.9
   
$
1,531.5
 
Cost of goods sold
   
1,573.9
     
1,349.9
     
1,222.7
 
Gross margin
   
387.2
     
236.0
     
308.8
 
Selling and administration
   
161.4
     
134.4
     
135.3
 
Restructuring charges
   
10.7
     
34.2
     
 
Other operating income
   
8.8
     
2.5
     
9.1
 
Operating income
   
223.9
     
69.9
     
182.6
 
Earnings of non-consolidated affiliates
   
9.6
     
29.9
     
37.7
 
Interest expense
   
30.4
     
25.4
     
11.6
 
Interest income
   
1.2
     
1.0
     
1.1
 
Other income
   
175.1
     
1.5
     
0.1
 
Income before taxes
   
379.4
     
76.9
     
209.9
 
Income tax provision
   
137.7
     
12.1
     
74.2
 
Net income
 
$
241.7
     
64.8
   
$
135.7
 
Net income per common share:
                       
Basic
 
$
3.02
     
0.82
   
$
1.74
 
Diluted
 
$
2.99
     
0.81
   
$
1.73
 


 
25

 

2011 Compared to 2010

Sales for 2011 were $1,961.1 million compared to $1,585.9 million last year, an increase of $375.2 million, or 24%.  Chlor Alkali Products’ sales increased $352.5 million, or 34%, primarily due to the inclusion of SunBelt sales of $170.5 million, higher ECU prices and increased sales of co-products.  Our ECU netbacks, excluding SunBelt, increased 18% compared to last year.  Winchester sales increased by $22.7 million, or 4%, from 2010 primarily due to increased shipments to domestic commercial customers, military and international customers.

Gross margin increased $151.2 million, or 64%, from 2010, primarily as a result of increased Chlor Alkali Products’ gross margin due to the contribution from SunBelt and increased ECU netbacks, partially offset by reduced Winchester gross margin resulting from higher commodity and other material costs.  Gross margin as a percentage of sales increased to 20% in 2011 from 15% in 2010.

Selling and administration expenses in 2011 increased $27.0 million, or 20%, from 2010 primarily due to increased expenses associated with the inclusion of SunBelt’s selling and administration expenses of $9.3 million, higher recruiting and relocation charges of $5.2 million, increased salary and benefit costs of $5.1 million, an unfavorable foreign currency impact of $2.4 million, higher bad debt costs of $1.1 million, higher consulting charges of $1.0 million, SunBelt acquisition costs of $0.8 million, and increased management incentive compensation of $0.5 million, which included mark-to-market adjustments on stock-based compensation.  Selling and administration expenses as a percentage of sales were 8% in 2011 and 2010.

Restructuring charges in 2011 and 2010 of $10.7 million and $34.2 million, respectively, were primarily associated with exiting the use of mercury cell technology in the chlor alkali manufacturing process by the end of 2012 and our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.

Other operating income in 2011 increased $6.3 million from 2010.  Other operating income for 2011 included a gain of $3.7 million on the sale of a former manufacturing site and $1.9 million of insurance recoveries related to our Oxford, MS and St. Gabriel, LA facilities.

The earnings of non-consolidated affiliates were $9.6 million for 2011, a decrease of $20.3 million from 2010, primarily due to the acquisition of the remaining 50% interest in SunBelt that was completed on February 28, 2011.  Since the date of acquisition, SunBelt’s results are no longer included in earnings of non-consolidated affiliates but are consolidated in our consolidated financial statements.

Interest expense increased by $5.0 million in 2011, primarily due to a higher level of outstanding debt, which includes the SunBelt Notes, partially offset by lower interest rates.

Other income in 2011 included a pretax gain of $181.4 million as a result of remeasuring our previously held 50% equity interest in SunBelt, partially offset by $6.7 million of expense for our earn out liability from the SunBelt acquisition.  Other income 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 2011 included a benefit of $4.9 million related to remeasurement of deferred taxes due to an increase in state tax effective rates, a $4.2 million benefit related to the expiration of statutes of limitations in federal and state jurisdictions, a $1.8 million expense associated with the finalization of our 2010 domestic and Canadian income tax returns and a deferred tax expense of $76.0 million related to the tax effect of the gain recorded on the remeasurement of our previously held 50% equity interest in SunBelt.  After giving consideration to these four items of $68.7 million and the SunBelt pretax gain of $181.4 million, the effective tax rate of 34.8% for 2011 was lower than the 35% U.S. federal statutory rate, primarily due to favorable permanent tax deduction items, including the domestic manufacturing deduction and tax deductible dividends paid to the Contributing Employee Ownership Plan (CEOP), which were partially offset by state income taxes.  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 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 CEOP, which were offset in part by state income taxes.

2010 Compared to 2009

Our total sales for 2010 were $1,585.9 million compared to $1,531.5 million in 2009, 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 2009.  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.


 
26

 

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 charges 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 our ongoing 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 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 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.


 
27

 

SEGMENT RESULTS

We define segment results as income (loss) before interest expense, interest income, other operating income, other income, 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.

   
Years ended December 31,
 
   
2011
   
2010
   
2009
 
Sales:
 
($ in millions)
 
Chlor Alkali Products
 
$
1,389.1
   
$
1,036.6
   
$
963.8
 
Winchester
   
572.0
     
549.3
     
567.7
 
Total sales
 
$
1,961.1
   
$
1,585.9
   
$
1,531.5
 
Income before taxes:
                       
Chlor Alkali Products(1)
 
$
245.0
   
$
117.2
   
$
125.4
 
Winchester
   
37.9
     
63.0
     
68.6
 
Corporate/Other:
                       
Pension income(2)
   
27.8
     
24.6
     
22.3
 
Environmental (expense) income(3)
   
(7.9
)
   
(9.1
)
   
58.0
 
Other corporate and unallocated costs
   
(67.4
)
   
(64.2
)
   
(63.1
)
Restructuring charges(4)
   
(10.7
)
   
(34.2
)
   
 
Other operating income(5)
   
8.8
     
2.5
     
9.1
 
Interest expense(6)
   
(30.4
)
   
(25.4
)
   
(11.6
)
Interest income
   
1.2
     
1.0
     
1.1
 
Other income(7)
   
175.1
     
1.5
     
0.1
 
Income before taxes
 
$
379.4
   
$
76.9
   
$
209.9
 

(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 $9.6 million, $29.9 million and $37.7 million for the years ended 2011, 2010 and 2009, respectively.  On February 28, 2011, we acquired the remaining 50% interest in SunBelt.  Since the date of acquisition, SunBelt’s results are no longer included in earnings of non-consolidated affiliates but are consolidated in our consolidated financial statements.

(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 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.

(3)
Environmental (expense) income for the years ended 2011, 2010 and 2009 included $11.4 million, $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 charges for the years ended 2011 and 2010 were primarily associated with exiting the use of mercury cell technology in the chlor alkali manufacturing process by the end of 2012 and our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.

(5)
Other operating income for the year ended 2011 included a gain of $3.7 million on the sale of a former manufacturing site and $1.9 million of insurance recoveries related to our Oxford, MS and St. Gabriel, LA facilities.  Other operating income for 2009 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 $1.2 million, $0.9 million and $9.7 million for the years ended 2011, 2010 and 2009, respectively.

(7)
Other income for the year ended 2011 included a pretax gain of $181.4 million as a result of remeasuring our previously held 50% equity interest in SunBelt, partially offset by $6.7 million of expense for our earn out liability from the SunBelt acquisition.  The income tax provision for the year ended 2011 included a $76.0 million discrete deferred tax expense as a result of the remeasurement of the SunBelt investment.  Other income for the year ended 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.

 
28

 


Chlor Alkali Products

2011 Compared to 2010

Chlor Alkali Products’ sales for 2011 were $1,389.1 million compared to $1,036.6 million for 2010, an increase of $352.5 million, or 34%.  The acquisition of SunBelt contributed sales of $170.5 million for 2011.  Chlor Alkali Products’ sales, excluding SunBelt, increased $182.0 million, or 18%.  The sales increase was primarily due to higher ECU pricing, which increased 18% from 2010.  Chlorine and caustic soda volumes increased 1% from 2010.  Bleach volumes increased 15% for 2011 compared to last year, and hydrochloric acid volumes increased 12% compared to 2010.  Our ECU netback, excluding SunBelt, was approximately $560 for 2011 compared to approximately $475 for 2010.  The SunBelt ECU netback for 2011 was approximately $605.  Freight costs included in the ECU netback increased 20% for 2011 compared to the prior year, primarily due to higher railroad freight rates.  Our operating rate for 2011 was 80% compared to our operating rate of 82% in 2010.  The 2011 operating rate was affected by the combination of planned multi-month outages by two chlorine customers and a weakening of chlorine demand.

Chlor Alkali Products posted segment income of $245.0 million for 2011, compared to $117.2 million for 2010, an increase of $127.8 million, or 109%.  Chlor Alkali Products segment income was higher primarily due to higher ECU netbacks ($112.5 million), higher SunBelt earnings ($53.8 million) and increased volumes ($8.0 million).  The higher SunBelt earnings primarily related to $38.7 million of additional income on the remaining 50% interest we acquired and higher ECU netbacks.  These increases were partially offset by increased operating costs ($46.5 million), primarily raw materials and electricity.

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.

Winchester

2011 Compared to 2010

Winchester sales were $572.0 million for 2011 compared to $549.3 million for 2010, an increase of $22.7 million, or 4%.  Sales of ammunition to domestic commercial customers increased $10.2 million, shipments to military and international customers increased $7.9 million and $7.2 million, respectively, and shipments to industrial customers, who primarily supply the construction sector, increased $1.2 million.  These increases were partially offset by lower shipments to law enforcement agencies of $3.8 million.

Winchester reported segment income of $37.9 million for 2011 compared to $63.0 million for 2010, a decrease of $25.1 million, or 40%.  The decrease was primarily due to the impact of increased commodity and other material costs and higher operating costs ($40.8 million), partially offset by higher selling prices ($15.7 million).

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.  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.

 
29

 

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).

Corporate/Other

2011 Compared to 2010

For 2011, pension income included in corporate/other was $27.8 million compared to $24.6 million for 2010.  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 2011 was $22.5 million compared to $17.7 million for 2010.  Pension income on a total company basis for 2011 and 2010 included curtailment charges of $1.1 million and $3.2 million, respectively, associated with our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS, which were included in the restructuring charges for 2011 and 2010.

Charges to income for environmental investigatory and remedial activities were $7.9 million for 2011 compared to $9.1 million for 2010, which included $11.4 million and $7.2 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 $19.3 million for 2011 compared with $16.3 million for 2010.  These charges related primarily to expected future investigatory and remedial activities associated with past manufacturing operations and former waste disposal sites.

For 2011, other corporate and unallocated costs were $67.4 million compared to $64.2 million for 2010, an increase of $3.2 million, or 5%.  The increase was primarily due to higher salary and benefit costs of $2.6 million, increased asset retirement obligation and legacy site charges of $1.2 million, an unfavorable foreign currency impact of $1.0 million, SunBelt acquisition costs of $0.8 million, and higher consulting charges of $0.5 million.  These increases were partially offset by a lower level of legal and legal-related settlement expenses of $2.6 million and decreased management incentive compensation of $0.5 million, primarily due to mark-to-market adjustments on stock-based compensation.

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 our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS, which was included in the restructuring charges 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.


 
30

 
2012 OUTLOOK

Net income in the first quarter of 2012 is projected to be in the $0.35 to $0.40 per diluted share range.
 
    In Chlor Alkali Products, the first quarter of 2012 segment earnings are expected to increase compared to both the fourth quarter of 2011 earnings of $50.3 million and the first quarter of 2011 earnings of $45.2 million.  The expected improved segment earnings compared to the first quarter of 2011 anticipates higher ECU netbacks and a full quarter of 100% ownership of SunBelt.  The expected improved earnings compared to the fourth quarter of 2011 anticipates higher chlorine and caustic soda shipment volumes.  The Chlor Alkali Products’ operating rate in the first quarter of 2012 is forecast to be in the 80% range, which is an improvement from the fourth quarter of 2011 level of 70% and comparable to the first quarter of 2011 level of 80%.

ECU netbacks in the fourth quarter of approximately $580 declined slightly from the third quarter level of approximately $590, as chlorine price declines more than offset increases in caustic soda prices.  ECU netbacks in the first quarter of 2012 are forecast to decline slightly from the fourth quarter of 2011 as we expect the fourth quarter chlorine and caustic soda pricing trends to continue into the first quarter of 2012.  While the success of the third quarter 2011 $65 per ton caustic soda price increase is not yet known, the majority of the benefits of this price increase, if realized, would impact our system in the first quarter of 2012.  While the success of the fourth quarter 2011 $80 per ton caustic soda price increase is not yet known, we believe that it is unlikely that any benefit of this price increase will be realized in the first quarter of 2012.

Winchester first quarter 2012 segment earnings are expected to be comparable with the first quarter of 2011 segment earnings of $12.5 million.  Higher commodity costs and lower levels of commercial demand compared to the first quarter of 2011 are expected to offset higher selling prices.

Winchester’s 2011 acquired cost of all commodity metals increased compared to 2010 levels.  The purchase price of copper increased 28%, the price of lead increased 14% and the price of zinc increased 7%.  Winchester utilizes approximately three times as much lead as copper and three times as much copper as zinc.  As we look forward into 2012, the price of commodity metals will likely continue to present a significant challenge.

During 2011, Winchester was awarded the U.S. Army’s “Second Source” ammunition contract, which has the potential to generate $300 million of sales over five years.  The contract provides for the production of .50 caliber, 5.56 millimeter, and 7.62 millimeter ammunition.  As a result of this contract, Winchester anticipates that sales to military customers will increase in 2012 compared to 2011, while sales to law enforcement customers are expected to decline in 2012 from 2011 due to state and local government budget pressures.

In January 2012, Winchester announced it had formed a joint venture named U.S. Munitions with BAE Systems to submit a proposal for the operation and maintenance of the Lake City Army Ammunition Plant.  The Lake City Army Ammunition Plant is the U.S. Army’s primary manufacturing location for small caliber ammunition.  We believe U.S. Munitions provides the best opportunity for Winchester to participate in the Lake City competition.  It is expected that a decision by the U.S. Army will be made during the fourth quarter of 2012 and that after a one-year transition period, the selected contractor will assume responsibility for the plant on October 1, 2013.  This represents a long-term opportunity for Winchester.

We anticipate that 2012 charges for environmental investigatory and remedial activities will be in the $20 million range, which is comparable with the 2011 level of $19.3 million, before the recoveries of environmental costs incurred and expensed in prior periods are considered.  We do not believe that there will be additional recoveries of environmental costs incurred and expensed in prior periods in 2012.

We expect defined benefit pension plan income in 2012 to be similar to the 2011 level.  Based on the December 31, 2011 funding status, we will not be required to make any cash contributions to our domestic defined benefit pension plan in 2012.  We do have a small Canadian defined benefit pension plan to which we made contributions of $0.9 million and $9.8 million in 2011 and 2010, respectively, and we anticipate cash contributions of less than $5 million in 2012.

During the first quarter of 2012, we are anticipating pretax restructuring charges of approximately $2.5 million primarily associated with our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS and exiting the use of mercury cell technology in the chlor alkali manufacturing process by the end of 2012.  We are expecting total pretax restructuring charges for 2012 related to these projects to be approximately $10 million.  We expect to incur restructuring charges through 2016 totaling approximately $17 million related to our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  We also expect to incur restructuring charges through 2013 totaling approximately $8 million related to exiting the use of mercury cell technology in the chlor alkali manufacturing process.

We believe the 2012 effective tax rate will be in the 36% to 37% range.


 
31

 

In 2012, we expect capital spending to be in the $215 million to $245 million range, which includes spending for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology, the low salt, high strength bleach facilities at our McIntosh, AL; Henderson, NV; and Niagara Falls, NY chlor alkali sites, the reconfiguration of our Augusta, GA facility to manufacture bleach and distribute caustic soda, and our ongoing relocation of our Winchester centerfire ammunition manufacturing operations.  We anticipate the start-up of the converted Charleston, TN chlor alkali facility in the second half of 2012.  We expect to complete the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.  The two remaining low salt, high strength bleach facilities are expected to be completed by the fourth quarter of 2012.  These three new facilities will increase total bleach manufacturing capacity by an additional 50% over the 2011 capacity.  These low salt, high strength bleach facilities will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.  We expect 2012 depreciation expense to be approximately $110 million.

ENVIRONMENTAL MATTERS
   
Years ended December 31,
 
   
2011
   
2010
   
2009
 
Cash outlays (receipts):
 
($ in millions)
 
Remedial and investigatory spending (charged to reserve)
 
$
23.3
   
$
15.7
   
$
19.0
 
Recoveries from third parties
   
(11.4
)
   
(7.2
)
   
(82.1
)
Capital spending
   
2.5
     
1.3
     
2.9
 
Plant operations (charged to cost of goods sold)
   
26.1
     
24.1
     
24.4
 
Total cash outlays (receipts)
 
$
40.5
   
$
33.9
   
$
(35.8
)

Our liabilities for future environmental expenditures were as follows:
   
December 31,
 
   
2011
   
2010
   
2009
 
   
($ in millions)
 
Beginning balance
 
$
167.6
   
$
166.1
   
$
158.9
 
Charges to income
   
19.3
     
16.3
     
24.1
 
Remedial and investigatory spending
   
(23.3
)
   
(15.7
)
   
(19.0
)
Currency translation adjustments
   
(0.3
)
   
0.9
     
2.1
 
Ending balance
 
$
163.3
   
$
167.6
   
$
166.1
 

Total environmental-related cash outlays in 2011 increased compared to 2010,  primarily driven by remedial and investigatory spending due to the implementation of a remedial action plan at a former waste disposal site in 2011, partially offset by increased recoveries from third parties of costs incurred and expensed in prior periods.  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.  Total environmental-related cash outlays for 2012 are estimated to be approximately $60 million, of which approximately $30 million is expected to be spent on investigatory and remedial efforts, approximately $4 million on capital projects and approximately $26 million on normal plant operations.  Remedial and investigatory spending is anticipated to be higher in 2012 than 2011 due to the ongoing remedial actions at a former waste disposal site and the implementation of remedial actions at another former manufacturing 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.


 
32

 

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 $3.2 million at December 31, 2011.  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 2011, 2010 and 2009 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,
 
   
2011
   
2010
   
2009
 
   
($ in millions)
 
Charges to income
 
$
19.3
   
$
16.3
   
$
24.1
 
Recoveries from third parties of costs incurred and expensed in prior periods
   
(11.4
)
   
(7.2
)
   
(82.1
)
Total environmental expense (income)
 
$
7.9
   
$
9.1
   
$
(58.0
)

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 2011, was attributable to 70 sites, 17 of which were USEPA National Priority List (NPL) sites.  Ten sites accounted for 78% of our environmental liability and, of the remaining 60 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, 2011 for future environmental expenditures.

Our consolidated balance sheets included liabilities for future environmental expenditures to investigate and remediate known sites amounting to $163.3 million at December 31, 2011, and $167.6 million at December 31, 2010, of which $132.3 million and $139.6 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 $163.3 million included on our consolidated balance sheet at December 31, 2011 for future environmental expenditures, we currently expect to utilize $92.2 million of the reserve for future environmental expenditures over the next 5 years, $24.4 million for expenditures 6 to 10 years in the future, and $46.7 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 consolidated 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, 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, 2011, we estimate it is reasonably possible that we may have additional contingent environmental liabilities of $40 million in addition to the amounts for which we have already recorded as a reserve.


 
33

 

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, 2011 and 2010, our consolidated balance sheets included liabilities for these legal actions of $16.4 million and $18.1 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 position or results of operations in the near term.

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,
 
   
2011
   
2010
   
2009
 
Provided by (used for)
 
($ in millions)
 
Gain on remeasurement of investment in SunBelt
 
$
(181.4
)
 
$
   
$
 
Net operating activities
   
215.9
     
115.5
     
200.2
 
Capital expenditures
   
(200.9
)
   
(85.3
)
   
(137.9
)
Business acquired in purchase transaction, net of cash acquired
   
(123.4
)
   
     
 
Restricted cash activity, net
   
50.3
     
(102.0
)
   
 
Net investing activities
   
(259.6
)
   
(159.7
)
   
(87.7
)
Long-term debt (repayments) borrowings, net
   
(51.2
)
   
96.3
     
150.3
 
Net financing activities
   
(110.1
)
   
44.3
     
99.5
 

Operating Activities

For 2011, cash provided by operating activities increased by $100.4 million from 2010, primarily due to higher earnings, partially offset by a larger increase in working capital.  In 2011, working capital increased $22.0 million compared with an increase of $9.7 million in 2010.  Receivables increased during 2011 by $26.2 million as a result of higher sales in the fourth quarter of 2011 compared to 2010.  Inventories increased from December 31, 2010 by $17.0 million, partially due to our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  Accounts payable and accrued liabilities increased from December 31, 2010 by $15.6 million.  The 2011 cash from operations was also impacted by a $47.4 million increase in cash tax payments.  In 2011, we made cash contributions to our Canadian qualified defined benefit pension plan of $0.9 million compared with $9.8 million in 2010.

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 2009.  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 Canadian qualified defined benefit pension plan of $9.8 million.

Capital Expenditures

Capital spending was $200.9 million, $85.3 million, and $137.9 million in 2011, 2010 and 2009, respectively.  Capital spending for 2011 included $51.0 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations and $60.0 million for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology.  The capital spending for the ongoing Winchester relocation was partially financed by $31 million of grants provided by the State of Mississippi and local governments.  The full amounts of these grants were received in 2011.  The 2011 capital spending also included approximately $20 million for the construction of low salt, high strength bleach facilities at our McIntosh, AL; Henderson, NV; and Niagara Falls, NY chlor alkali sites.  Capital spending in 2010 included bleach manufacturing and bleach shipping by railroad expansion projects at three of our Chlor Alkali facilities.  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.  Capital spending was 206%, 100%, and 196% of depreciation in 2011, 2010 and 2009, respectively.


 
34

 

In 2012, we expect our capital spending to be in the $215 million to $245 million range, which includes spending for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology, the low salt, high strength bleach facilities, the reconfiguration of our Augusta, GA facility to manufacture bleach and distribute caustic soda, and our ongoing relocation of our Winchester centerfire ammunition manufacturing operations.  We anticipate the start-up of the converted Charleston, TN chlor alkali facility in the second half of 2012.  We expect to complete the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.  The two remaining low salt, high strength bleach facilities are expected to be completed by the fourth quarter of 2012.  These three new facilities will increase total bleach manufacturing capacity by an additional 50% over the 2011 capacity.  These low salt, high strength bleach facilities will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.

Investing Activities

In 2011 and 2010, we drew $36.0 million and $117.0 million, respectively, of Go Zone and Recovery Zone bonds issued in 2010.  The proceeds of these bonds are required to be used to fund capital projects in Alabama, Mississippi, and Tennessee.  As of December 31, 2011, $51.7 million of the proceeds have not been used and are classified as a noncurrent asset on our consolidated balance sheet as restricted cash.  In 2011 and 2010, we utilized $86.3 million and $15.0 million, respectively, of the Go Zone and Recovery Zone proceeds to fund qualifying capital spending.

The 2010 and 2009 distributions from affiliated companies primarily reflected the cash impact of our share of SunBelt’s earnings.

On February 28, 2011, we acquired the remaining 50% interest in SunBelt and paid cash of $123.4 million, net of $8.9 million of cash acquired.

During the fourth quarter of 2011, we entered into a sale/leaseback transaction for chlorine railcars that we acquired in 2011.  We received proceeds from the sale of $3.2 million.

Financing Activities

In December 2011, we repaid the $75.0 million 2011 Notes, which became due, and repaid $12.2 million due under the annual requirements of the SunBelt Notes.

In December 2010, we completed a financing of Recovery Zone bonds totaling $83.0 million due 2033 and 2035.  During December 2010, we drew the entire $83.0 million of the bonds.  As of December 31, 2011, $40.1 million of the proceeds remain with the trustee and are classified as a noncurrent asset on our consolidated balance sheet as restricted cash, until such time as we request reimbursement of qualifying amounts used for the Charleston, TN facility mercury cell conversion and our ongoing Winchester relocation.

In October 2010, we completed a financing of Go Zone and Recovery Zone bonds totaling $70.0 million due 2024.  We drew $36.0 million of these bonds in 2011 and $34.0 million in 2010.  As of December 31, 2011, $11.6 million of the proceeds remain with the trustee and are classified as a noncurrent asset on our consolidated balance sheet as restricted cash, until such time as we request reimbursement of qualifying amounts used for capital project spending at our McIntosh, AL facility.

In September 2010, we redeemed 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 August 2009, we sold $150.0 million of 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.

In February 2009, we reissued $1.5 million of variable rate Mississippi industrial revenue bonds, which were redeemed by us at par value in October 2008.  These were originally issued in 2005 in conjunction with our relocation of a portion of our Winchester operations to Oxford, MS.


 
35

 

In 2011, 2010 and 2009, we issued 0.5 million; 0.2 million; and less than 0.1 million shares with a total value of $9.3 million, $3.1 million and $0.2 million, respectively, representing stock options exercised.  In addition, during 2011, 2010 and 2009, we issued zero; 0.5 million; and 1.3 million shares of common stock, respectively, with a total value of zero, $10.2 million and $16.9 million, respectively, to the Olin CEOP.  Effective September 23, 2010, our CEOP began to purchase shares in the open market in lieu of our issuing shares to satisfy the investment in our common stock resulting from employee contributions, our matching contributions, retirement contributions and re-invested dividends.  Effective February 1, 2011, we reinstated the match on all salaried and certain non-bargained hourly employees’ contributions, which had previously been suspended effective January 1, 2010.

In 2011, we purchased and retired 0.2 million shares with a total value of $4.2 million under the share repurchase program approved by our board of directors on July 21, 2011.

The percent of total debt to total capitalization decreased to 35.2% at December 31, 2011, from 37.4% at year-end 2010 and 32.6% at year-end 2009.  The 2011 decrease was due primarily to higher shareholders’ equity resulting from the net income for the year ended December 31, 2011, partially offset by a higher level of long-term debt at December 31, 2011.  The 2010 increase from 2009 was due primarily to the higher level of long-term debt at December 31, 2010 resulting from the issuance of Go Zone and Recovery Zone bonds, partially offset by higher shareholders’ equity resulting from the net income for the year ended December 31, 2010.

Dividends per common share were $0.80 in 2011, 2010 and 2009.  Total dividends paid on common stock amounted to $64.0 million, $63.3 million and $62.5 million in 2011, 2010 and 2009, respectively.  On January 27, 2012, our board of directors declared a dividend of $0.20 per share on our common stock, payable on March 9, 2012 to shareholders of record on February 10, 2012.

The payment of cash dividends is subject to the discretion of our board of directors and will be determined in light of then-current conditions, including our earnings, our operations, our financial condition, our capital requirements and other factors deemed relevant by our board of directors.  In the future, our board of directors may change our dividend policy, including the frequency or amount of any dividend, in light of then-existing conditions.

LIQUIDITY AND OTHER FINANCING ARRANGEMENTS

Our principal sources of liquidity are from cash and cash equivalents, restricted cash, cash flow from operations, and short-term borrowings under our senior revolving credit facility.  Additionally, we believe that we have access to the debt and equity markets.

Cash flow from operations is variable as a result of both the seasonal and the cyclical nature of our operating results, which have been affected by seasonal and economic cycles in many of the industries we serve, such as the vinyls, urethanes, bleach, ammunition and pulp and paper.  The seasonality of the ammunition business, which is typically driven by the fall hunting season, and the seasonality of the vinyls and bleach businesses, which are stronger in periods of warmer weather, typically cause working capital to fluctuate between $50 million to $100 million over the course of the year.  Cash flow from operations is affected by changes in ECU selling prices caused by the changes in the supply/demand balance of chlorine and caustic soda, resulting in the chlor alkali business having significant leverage on our earnings and cash flow.  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 $18 million annual change in our revenues and pretax profit when we are operating at full capacity.

For 2011, cash provided by operating activities increased by $100.4 million from 2010, primarily due to higher earnings, partially offset by a larger increase in working capital.  In 2011, working capital increased $22.0 million compared with an increase of $9.7 million in 2010.  Receivables increased during 2011 by $26.2 million as a result of higher sales in the fourth quarter of 2011 compared to 2010.  Inventories increased from December 31, 2010 by $17.0 million, partially due to our ongoing relocation of our Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  Accounts payable and accrued liabilities increased from December 31, 2010 by $15.6 million.  The 2011 cash from operations was also impacted by a $47.4 million increase in cash tax payments.  In 2011, we made cash contributions to our Canadian qualified defined benefit pension plan of $0.9 million compared with $9.8 million in 2010.

Capital spending was $200.9 million, $85.3 million, and $137.9 million in 2011, 2010 and 2009, respectively.  Capital spending for 2011 included $51.0 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations and $60.0 million for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology.  The capital spending for the ongoing Winchester relocation was partially financed by $31 million of grants provided by the State of Mississippi and local governments.  The full amounts of these grants were received in 2011.  The 2011 capital spending also included approximately $20 million for the construction of low salt, high strength bleach facilities at our McIntosh, AL; Henderson, NV; and Niagara Falls, NY chlor alkali sites.  Capital spending in 2010 included bleach manufacturing and bleach shipping by railroad expansion projects at three of our Chlor Alkali facilities.  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.  Capital spending was 206%, 100%, and 196% of depreciation in 2011, 2010 and 2009, respectively.


 
36

 

In 2012, we expect our capital spending to be in the $215 million to $245 million range, which includes spending for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology, the low salt, high strength bleach facilities, the reconfiguration of our Augusta, GA facility to manufacture bleach and distribute caustic soda, and our ongoing relocation of our Winchester centerfire ammunition manufacturing operations.  We anticipate the start-up of the converted Charleston, TN chlor alkali facility in the second half of 2012.  We expect to complete the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.  The two remaining low salt, high strength bleach facilities are expected to be completed by the fourth quarter of 2012.  These three new facilities will increase total bleach manufacturing capacity by an additional 50% over the 2011 capacity.  These low salt, high strength bleach facilities will double the concentration of the bleach we manufacture, which should significantly reduce transportation costs.

The overall use of cash of $153.8 million in 2011 primarily reflects the acquisition of the remaining 50% equity interest in SunBelt and the debt repayments in December 2011.  Based on our December 31, 2011 unrestricted cash balance of $304.8 million, the restricted cash balance of $51.7 million, and the availability of approximately $231.5 million of liquidity from our senior revolving credit facility, we believe we have sufficient liquidity to meet our short-term and long-term needs.  Additionally, we believe that we have access to the debt and equity markets.

On July 21, 2011, our board of directors authorized a share repurchase program for up to 5 million shares of common stock that will terminate in three years for any remaining shares not yet repurchased.  Since the date of authorization, 0.2 million shares were purchased and retired under this program at a cost of $4.2 million.  As of December 31, 2011, we had purchased a total of 0.2 million shares under this program and 4.8 million shares remained authorized to be purchased.  The repurchases will be effected from time to time on the open market, or in privately negotiated transactions.

Pursuant to a note purchase agreement dated December 22, 1997, SunBelt sold $97.5 million of Guaranteed Senior Secured Notes due 2017, Series O, and $97.5 million of Guaranteed Senior Secured Notes due 2017, Series G.  We refer to these notes as the SunBelt Notes.  The SunBelt Notes bear interest at a rate of 7.23% per annum, payable semi-annually in arrears on each June 22 and December 22.  Beginning on December 22, 2002 and each year through 2017, SunBelt is required to repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable to the Series O Notes and of which $6.1 million is attributable to the Series G Notes.  In conjunction with the SunBelt acquisition, we consolidated the SunBelt Notes with a fair value of $87.3 million for the remaining principal balance of $85.3 million as of February 28, 2011.  In December 2011, $12.2 million was repaid on these SunBelt Notes.

In December 2011, we repaid the $75.0 million 2011 Notes, which became due in 2011.

In December 2010, we completed a financing of Recovery Zone tax-exempt bonds totaling $41.0 million due 2035.  The bonds were issued by the Industrial Development Board of the County of Bradley and the City of Cleveland, TN (TN Authority) pursuant to a trust indenture between the TN Authority and U. S. Bank National Association, as trustee.  The bonds were sold to PNC Bank, National Association (PNC Bank), as administrative agent for itself and a syndicate of participating banks, in a private placement under a Credit and Funding Agreement dated December 27, 2010, between us and PNC Bank.  Proceeds of the bonds will be loaned by the TN Authority to us under a loan agreement, whereby we are obligated to make loan payments to the TN Authority sufficient to pay all debt service and expenses related to the bonds.  Our obligations under the loan agreement and related note bear interest at a fluctuating rate based on London InterBank Offered Rate (LIBOR).  The financial covenants in the credit agreement mirror those in our senior revolving credit facility.  The bonds may be tendered to us (without premium) periodically beginning November 1, 2015.  During December 2010, we drew $41.0 million of the bonds.  The proceeds from the bonds are required to be used to fund capital project spending for our Charleston, TN facility mercury cell conversion.  As of December 31, 2011, $26.0 million of the proceeds remain with the trustee and are classified as a noncurrent asset on our consolidated balance sheet as restricted cash, until such time as we request reimbursement of qualifying amounts used for the Charleston, TN facility mercury cell conversion.

In December 2010, we completed a financing of Recovery Zone tax-exempt bonds totaling $42.0 million due 2033.  The bonds were issued by the Mississippi Business Finance Corporation (MS Finance) pursuant to a trust indenture between MS Finance and U. S. Bank National Association, as trustee.  The bonds were sold to PNC Bank as administrative agent for itself and a syndicate of participating banks, in a private placement under a Credit and Funding Agreement dated December 1, 2010, between us and PNC Bank.  Proceeds of the bonds will be loaned by MS Finance to us under a loan agreement, whereby we are obligated to make loan payments to MS Finance sufficient to pay all debt service and expenses related to the bonds.  Our obligations under the loan agreement and related note bear interest at a fluctuating rate based on LIBOR.  The financial covenants in the credit agreement mirror those in our senior revolving credit facility.  The bonds may be tendered to us (without premium) periodically beginning November 1, 2015.  During December 2010, we drew $42.0 million of the bonds.  The proceeds from the bonds are required to be used to fund capital project spending for our ongoing relocation of the Winchester centerfire ammunition manufacturing operations from East Alton, IL to Oxford, MS.  As of December 31, 2011, $14.1 million of the proceeds remain with the trustee and are classified as a noncurrent asset on our consolidated balance sheet as restricted cash, until such time as we request reimbursement of qualifying amounts used for the Oxford, MS Winchester relocation.