Summary of OLIN CORP - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Background

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

Executive Summary

During the second and third quarters of 2009, a bill was introduced in the United States House of Representatives and the Senate, respectively, which, if enacted, would ban the production of chlor alkali products using mercury cell technology two years from the date it is enacted into law. On October 21, 2009, the House Committee on Energy and Commerce passed a bill that would require chlor alkali producers using mercury cell technology to make a decision by June 30, 2012 as to whether to shutdown or convert these facilities. If the decision is to convert, the mercury cell plants would be required to be converted by June 30, 2015. If the decision is not to convert, the plants would be required to be shutdown by June 30, 2013. For this bill to become law it must be passed by the full House of Representatives and the full Senate. No action has yet been taken by the Senate on its bill. Olin currently operates two facilities which utilize mercury cell technology totaling approximately 350,000 ECUs of capacity (approximately 18% of our capacity). We are closely monitoring the progress of these bills, but it is too soon to estimate the likelihood of enactment, and therefore to determine what impact there will be on Olin and the chlor alkali industry. Olin operates its mercury cell facilities in full compliance with all environmental rules and regulations.

Chlor Alkali Products' segment income was $3.9 million and $120.2 million for the three and nine months ended September 30, 2009, respectively. Chlor Alkali Products continued to experience the weak demand that began in the fourth quarter of 2008. Volumes for chlorine and caustic soda decreased 20% and 27% for the three and nine months ended September 30, 2009, respectively, compared to the prior year. Operating rates in Chlor Alkali Products for the three months ended September 30, 2009 and 2008 were 74% and 89%, respectively, and for the nine months ended September 30, 2009 and 2008 were 70% and 87%, respectively. These operating rates assume that 100% of our demonstrated capacity was available for use. The capacity of our St. Gabriel, LA facility has been shutdown since late November 2008 and the facility will not be available for use until the conversion and expansion project is completed. The mercury cell facility at St. Gabriel, LA became permanently inoperable during the first 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 has been idled. After taking these capacity reduction actions into consideration, our effective operating rates for the three and nine months ended September 30, 2009 were 86% and 79%, respectively.

The third quarter 2009 ECU netbacks of $375 were 43% lower than the third quarter of 2008 netbacks of $660, reflecting the changes in the pricing dynamics in North America. During 2008, North American demand for caustic soda remained 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 the first quarter of 2009 of approximately $765. Beginning late in the fourth quarter of 2008 and continuing into the third quarter of 2009, demand for caustic soda weakened significantly, and fell below the demand for chlorine. This created excess supply in North America, which has 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, which resulted in caustic soda price increase announcements of $180 per ton. We began realizing increases in chlorine prices in the third quarter of 2009 with most of the improvement expected in the fourth quarter of 2009 and into 2010. We expect caustic soda prices to decline further in the fourth quarter of 2009 before we are able to begin realizing the third quarter 2009 price increase announcements in caustic soda. We expect to begin realizing these price increases in caustic soda in the first quarter of 2010.

Winchester segment income was $23.0 million and $59.1 million for the three and nine months ended September 30, 2009, respectively. Winchester segment income for the three and nine months ended September 30, 2009, improved 135% and 102%, respectively, compared to prior year. Winchester's results reflected the continuation of the stronger than normal demand that began in the fourth quarter of 2008, lower commodity and other material costs, and improved pricing.

Earnings for the three and nine months ended September 30, 2009 included $44.3 million and $45.1 million, respectively, of recoveries from third parties for environmental costs incurred and expensed in prior periods.

On August 19, 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 will be paid semi-annually beginning on February 15, 2010. Proceeds of $145.5 million, after expenses of $3.3 million, from the 2019 Notes will be used to further strengthen our long-term liquidity given uncertain economic times.