final10qq12009.htm
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2009
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number 1-1070

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant 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 No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of March 31, 2009, 77,921,427 shares of the registrant’s common stock were outstanding.
 
 
1
 
Part I — Financial Information
 
Item 1. Financial Statements.
 
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Balance Sheets
(In millions, except per share data)
(Unaudited)
 
   
March 31,
2009
   
December 31,
2008
   
March 31,
2008
 
ASSETS
                 
Current Assets:
                 
Cash and Cash Equivalents
 
$
168.6
   
$
246.5
   
$
249.9
 
Short-Term Investments
   
     
     
26.1
 
Receivables, Net
   
216.4
     
213.0
     
229.7
 
Inventories
   
166.5
     
131.4
     
130.2
 
Current Deferred Income Taxes
   
62.8
     
68.5
     
64.2
 
Other Current Assets
   
11.5
     
10.9
     
22.7
 
Total Current Assets
   
625.8
     
670.3
     
722.8
 
Property, Plant and Equipment (less Accumulated Depreciation of $970.6, $956.0 and $929.4)
   
659.4
     
629.9
     
518.2
 
Prepaid Pension Costs
   
     
     
147.8
 
Deferred Income Taxes
   
23.5
     
46.8
     
 
Other Assets
   
83.3
     
70.8
     
71.3
 
Goodwill
   
301.9
     
301.9
     
301.9
 
Total Assets
 
$
1,693.9
   
$
1,719.7
   
$
1,762.0
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current Liabilities:
                       
Accounts Payable
 
$
124.2
   
$
145.6
   
$
167.9
 
Income Taxes Payable
   
     
0.6
     
7.4
 
Accrued Liabilities
   
202.6
     
253.6
     
222.5
 
Total Current Liabilities
   
326.8
     
399.8
     
397.8
 
Long-Term Debt
   
253.4
     
252.4
     
252.7
 
Accrued Pension Liability
   
43.3
     
51.5
     
50.9
 
Deferred Income Taxes
   
6.0
     
6.5
     
29.0
 
Other Liabilities
   
304.3
     
304.5
     
332.7
 
Total Liabilities
   
933.8
     
1,014.7
     
1,063.1
 
Commitments and Contingencies
                       
Shareholders’ Equity:
                       
Common Stock, Par Value $1 Per Share:  Authorized, 120.0 Shares;
                       
Issued and Outstanding 77.9, 77.3 and 74.7 Shares
   
77.9
     
77.3
     
74.7
 
Additional Paid-In Capital
   
809.3
     
801.6
     
747.8
 
Accumulated Other Comprehensive Loss
   
(253.8
)
   
(269.4
)
   
(144.4
)
Retained Earnings
   
126.7
     
95.5
     
20.8
 
Total Shareholders’ Equity
   
760.1
     
705.0
     
698.9
 
Total Liabilities and Shareholders’ Equity
 
$
1,693.9
   
$
1,719.7
   
$
1,762.0
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.
 
 
2
 

OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Income
(In millions, except per share data)
(Unaudited)
  
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
Sales
 
$
400.6
   
$
399.1
 
Operating Expenses:
               
Cost of Goods Sold
   
306.2
     
314.0
 
Selling and Administration
   
39.2
     
33.3
 
Other Operating Income
   
5.5
     
0.6
 
Operating Income
   
60.7
     
52.4
 
Earnings of Non-consolidated Affiliates
   
14.8
     
8.1
 
Interest Expense
   
1.6
     
4.5
 
Interest Income
   
0.5
     
2.8
 
Other Income
   
     
0.1
 
Income before Taxes
   
74.4
     
58.9
 
Income Tax Provision
   
27.7
     
21.6
 
Net Income
 
$
46.7
   
$
37.3
 
Net Income per Common Share:
               
Basic
 
$
0.60
   
$
0.50
 
Diluted
 
$
0.60
   
$
0.50
 
Dividends per Common Share
 
$
0.20
   
$
0.20
 
Average Common Shares Outstanding:
               
Basic
   
77.5
     
74.6
 
Diluted
   
77.6
     
75.0
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.
 
 
3
 
 
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Shareholders’ Equity
(In millions, except per share data)
(Unaudited)
 
   
Common Stock
                         
   
Shares
Issued
   
Par
Value
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Retained
Earnings
(Accumulated
Deficit)
   
Total
Shareholders’
Equity
 
Balance at January 1, 2008
   
74.5
   
$
74.5
   
$
742.0
   
$
(151.2
)
 
$
(1.6
)
 
$
663.7
 
Comprehensive Income:
                                               
Net Income
   
     
     
     
     
37.3
     
37.3
 
Translation Adjustment
   
     
     
     
1.1
     
     
1.1
 
Net Unrealized Gain
   
     
     
     
3.4
     
     
3.4
 
Amortization of Prior Service Costs and Actuarial Losses, Net
   
     
     
     
2.3
     
     
2.3
 
Comprehensive Income
                                           
44.1
 
Dividends Paid:
                                               
Common Stock ($0.20 per share)
   
     
     
     
     
(14.9
)
   
(14.9
)
Common Stock Issued for:
                                               
Stock Options Exercised
   
     
     
0.2
     
     
     
0.2
 
Employee Benefit Plans
   
0.2
     
0.2
     
3.9
     
     
     
4.1
 
Other Transactions
   
     
     
0.2
     
     
     
0.2
 
Stock-Based Compensation
   
     
     
1.5
     
     
     
1.5
 
Balance at March 31, 2008
   
74.7
   
$
74.7
   
$
747.8
   
$
(144.4
)
 
$
20.8
   
$
698.9
 
Balance at January 1, 2009
   
77.3
   
$
77.3
   
$
801.6
   
$
(269.4
)
 
$
95.5
   
$
705.0
 
Comprehensive Income:
                                               
Net Income
   
     
     
     
     
46.7
     
46.7
 
Translation Adjustment
   
     
     
     
(0.3
)
   
     
(0.3
)
Net Unrealized Gain
   
     
     
     
13.9
     
     
13.9
 
Amortization of Prior Service Costs and Actuarial Losses, Net
   
     
     
     
2.0
     
     
2.0
 
Comprehensive Income
                                           
62.3
 
Dividends Paid:
                                               
Common Stock ($0.20 per share)
   
     
     
     
     
(15.5
)
   
(15.5
)
Common Stock Issued for:
                                               
Employee Benefit Plans
   
0.6
     
0.6
     
6.6
     
     
     
7.2
 
Other Transactions
   
     
     
0.3
     
     
     
0.3
 
Stock-Based Compensation
   
     
     
0.8
     
     
     
0.8
 
Balance at March 31, 2009
   
77.9
   
$
77.9
   
$
809.3
   
$
(253.8
)
 
$
126.7
   
$
760.1
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.
 
 
4
 

OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
(Unaudited)
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
Operating Activities
           
Net Income
 
$
46.7
   
$
37.3
 
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Used for Operating Activities:
               
Earnings of Non-consolidated Affiliates
   
(14.8
)
   
(8.1
)
Other Operating Income – Gains on Disposition of Property, Plant and Equipment
   
(5.0
)
   
(0.2
)
Stock-Based Compensation
   
1.1
     
1.6
 
Depreciation and Amortization
   
16.6
     
17.3
 
Deferred Income Taxes
   
21.2
     
2.5
 
Qualified Pension Plan Contribution
   
(1.0
)
   
 
Qualified Pension Plan Income
   
(5.0
)
   
(4.0
)
Common Stock Issued under Employee Benefit Plans
   
0.6
     
1.2
 
Change in:
               
Receivables
   
(3.4
)
   
(27.7
)
Inventories
   
(35.1
)
   
(23.5
)
Other Current Assets
   
(0.6
)
   
(8.0
)
Accounts Payable and Accrued Liabilities
   
(46.3
)
   
(9.8
)
Income Taxes Payable
   
(3.3
)
   
6.8
 
Other Assets
   
     
0.7
 
Other Noncurrent Liabilities
   
0.8
     
4.3
 
Other Operating Activities
   
0.2
     
 ―
 
Net Operating Activities
   
(27.3
)
   
(9.6
)
Investing Activities
               
Capital Expenditures
   
(49.8
)
   
(23.1
)
Proceeds from Disposition of Property, Plant and Equipment
   
5.5
     
0.2
 
Distributions from (Advances to) Affiliated Companies, Net
   
1.4
     
(3.1
)
Other Investing Activities
   
(0.3
)
   
1.1
 
Net Investing Activities
   
(43.2
)
   
(24.9
)
Financing Activities
               
Long-Term Debt:
               
Borrowings
   
1.5
     
 
Repayments
   
     
(9.8
)
Issuance of Common Stock
   
6.6
     
2.9
 
Stock Options Exercised
   
     
0.1
 
Excess Tax Benefits from Stock Options Exercised
   
     
0.1
 
Dividends Paid
   
(15.5
)
   
(14.9
)
Net Financing Activities
   
(7.4
)
   
(21.6
)
Net Decrease in Cash and Cash Equivalents
   
(77.9
)
   
(56.1
)
Cash and Cash Equivalents, Beginning of Period
   
246.5
     
306.0
 
Cash and Cash Equivalents, End of Period
 
$
168.6
   
$
249.9
 
Cash Paid for Interest and Income Taxes:
               
Interest
 
$
0.2
   
$
0.5
 
Income Taxes, Net of Refunds
 
$
9.3
   
$
8.7
 
Non-Cash Investing Activities:
               
Capital Expenditures included in Accounts Payable and Accrued Liabilities
 
$
12.8
   
$
7.9
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the condensed financial statements.
 
5
OLIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
 
DESCRIPTION OF BUSINESS

Olin Corporation is a Virginia corporation, incorporated in 1892. We are a manufacturer concentrated in two business segments: Chlor Alkali Products and Winchester. Chlor Alkali Products, with nine U.S. manufacturing facilities and one Canadian manufacturing facility, produces chlorine and caustic soda, sodium hydrosulfite, hydrochloric acid, hydrogen, bleach products and potassium hydroxide. Winchester, with its principal manufacturing facility in East Alton, IL, produces and distributes sporting ammunition, reloading components, small caliber military ammunition and components, and industrial cartridges.

          We have prepared the condensed financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of the consolidated financial statements requires estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. In our opinion, these financial statements reflect all adjustments (consisting only of normal accruals), which are necessary to present fairly the results for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, we believe that the disclosures are appropriate. We recommend that you read these condensed financial statements in conjunction with the financial statements, accounting policies, and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008. Certain reclassifications were made to prior year amounts to conform to the 2009 presentation, including the reclassification of certain deferred tax amounts.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLES

Allowance for doubtful accounts receivable consisted of the following:

   
Three Months Ended
March 31,
 
   
2009
   
2008
 
   
($ in millions)
 
Balance at beginning of year
 
$
5.0
   
$
3.0
 
Provisions charged (credited)
   
4.7
     
(0.2
)
Write-offs, net of recoveries
   
(2.7
)
   
0.1
 
Balance at end of period
 
$
7.0
   
$
2.9
 

INVENTORIES

Inventories consisted of the following: 
   
March 31,
2009
   
December 31,
2008
   
March 31,
2008
 
   
($ in millions)
 
Supplies
 
$
26.7
   
$
27.2
   
$
25.5
 
Raw materials
   
77.6
     
56.4
     
42.4
 
Work in process
   
27.8
     
26.6
     
27.4
 
Finished goods
   
117.4
     
90.7
     
98.4
 
     
249.5
     
200.9
     
193.7
 
LIFO reserve
   
(83.0
)
   
(69.5
)
   
(63.5
)
Inventories, net
 
$
166.5
   
$
131.4
   
$
130.2
 
 
 
6
 
Inventories are valued at the lower of cost or market, with cost being determined principally by the dollar value last-in, first-out (LIFO) method of inventory accounting.  Cost for other inventories has been determined principally by the average cost method, primarily operating supplies, spare parts, and maintenance parts. Elements of costs in inventories included raw materials, direct labor, and manufacturing overhead.  Inventories under the LIFO method are based on annual estimates of quantities and costs as of year-end; therefore, the condensed financial statements at March 31, 2009, reflect certain estimates relating to inventory quantities and costs at December 31, 2009. If the first-in, first-out (FIFO) method of inventory accounting had been used, inventories would have been approximately $83.0 million, $69.5 million and $63.5 million higher than reported at March 31, 2009, December 31, 2008, and March 31, 2008, respectively.
 
EARNINGS PER SHARE

Basic and diluted net income per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share reflects the dilutive effect of stock-based compensation.
 
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
Computation of Basic Income per Share
 
($ and shares in millions, except per share data)
 
Net income
 
$
46.7
   
$
37.3
 
Basic shares
   
77.5
     
74.6
 
Basic net income per share
 
$
0.60
   
$
0.50
 
Computation of Diluted Income per Share
               
Net Income
 
$
46.7
   
$
37.3
 
Diluted shares:
               
Basic shares
   
77.5
     
74.6
 
Stock-based compensation
   
0.1
     
0.4
 
Diluted shares
   
77.6
     
75.0
 
Diluted net income per share
 
$
0.60
   
$
0.50
 

ENVIRONMENTAL

We are party to various government and private environmental actions associated with past manufacturing facilities and former waste disposal sites. Environmental provisions charged to income amounted to $4.8 million and $5.1 million for the three months ended March 31, 2009 and 2008, respectively.  Charges to income for investigatory and remedial efforts were material to operating results in 2008 and are expected to be material to operating results in 2009. The condensed balance sheets included reserves for future environmental expenditures to investigate and remediate known sites amounting to $160.1 million, $158.9 million, and $154.4 million at March 31, 2009, December 31, 2008, and March 31, 2008, respectively, of which $125.1 million, $123.9 million, and $119.4 million, respectively, were classified as other noncurrent liabilities.
  
Environmental exposures are difficult to assess for numerous reasons, including the identification of new sites, developments at sites resulting from investigatory studies, advances in technology, changes in environmental laws and regulations and their application, changes in regulatory authorities, the scarcity of reliable data pertaining to identified sites, the difficulty in assessing the involvement and financial capability of other potentially responsible parties (PRPs), our ability to obtain contributions from other parties, and the lengthy time periods over which site remediation occurs. It is possible that some of these matters (the outcomes of which are subject to various uncertainties) may be resolved unfavorably to us, which could materially adversely affect our financial position or results of operations.

 
 
7
 

SHAREHOLDERS’ EQUITY

Our board of directors, in April 1998, authorized a share repurchase program of up to 5 million shares of our common stock. We have repurchased 4,845,924 shares under the April 1998 program. There were no share repurchases during the three-month periods ended March 31, 2009 and 2008. At March 31, 2009, 154,076 shares remained authorized to be purchased.
 
       We issued less than 0.1 million shares with a total value of less than $0.1 million and $0.2 million, representing stock options exercised for the three months ended March 31, 2009 and 2008, respectively. In addition, we issued 0.6 million and 0.2 million shares with a total value of $7.2 million and $4.1 million for the three months ended March 31, 2009 and 2008, respectively, in connection with our Contributing Employee Ownership Plan (CEOP).
 
The following table represents the activity included in Accumulated Other Comprehensive Loss:

   
Foreign Currency Translation Adjustment
   
Unrealized Gains (Losses) on Derivative Contracts
(net of taxes)
   
Unrealized Losses on Marketable Securities
(net of taxes)
   
Amortization of Prior Service Costs and Actuarial Losses (net of taxes)
   
Accumulated Other Comprehensive Loss
 
   
($ in millions)
 
Balance at January 1, 2008
 
$
(1.2
)
 
$
1.0
   
$
   
$
(151.0
)
 
$
(151.2
)
Unrealized gains (losses)
   
1.1
     
5.9
     
(0.3
)
   
2.3
     
9.0
 
Gains reclassified into income
   
     
(2.2
)
   
     
     
(2.2
)
Balance at March 31, 2008
 
$
(0.1
)
 
$
4.7
   
$
(0.3
)
 
$
(148.7
)
 
$
(144.4
)
Balance at January 1, 2009
 
$
(5.1
)
 
$
(25.0
)
 
$
   
$
(239.3
)
 
$
(269.4
)
Unrealized gains (losses)
   
(0.3
)
   
4.7
     
     
2.0
     
6.4
 
Losses reclassified into income
   
     
9.2
     
     
     
9.2
 
Balance at March 31, 2009
 
$
(5.4
)
 
$
(11.1
)
 
$
   
$
(237.3
)
 
$
(253.8
)

SEGMENT INFORMATION

We define segment results as income before interest expense, interest income, other income, and income taxes, and include the operating results of non-consolidated affiliates.
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
Sales:
 
($ in millions)
 
Chlor Alkali Products
 
$
267.7
   
$
288.3
 
Winchester
   
132.9
     
110.8
 
Total sales
 
$
400.6
   
$
399.1
 
Income before taxes:
               
Chlor Alkali Products(1)
 
$
68.7
   
$
67.0
 
Winchester
   
17.0
     
10.0
 
Corporate/Other:
               
Pension income(2)
   
4.8
     
4.5
 
Environmental provision
   
(4.8
)
   
(5.1
)
Other corporate and unallocated costs
   
(15.7
)
   
(16.5
)
Other operating income(3)
   
5.5
     
0.6
 
Interest expense
   
(1.6
)
   
(4.5
)
Interest income
   
0.5
     
2.8
 
Other income
   
     
0.1
 
Income before taxes
 
$
74.4
   
$
58.9
 

 
 
8
 
(1)
Earnings of non-consolidated affiliates were included in the Chlor Alkali Products segment results consistent with management’s monitoring of the operating segments. The earnings from non-consolidated affiliates were $14.8 million and $8.1 million for the three months ended March 31, 2009 and 2008, respectively.
 
 
(2)
The service cost and the amortization of prior service cost components of pension expense related to the employees of the operating segments are allocated to the operating segments based on their respective estimated census data. All other components of pension costs are included in Corporate/Other and include items such as the expected return on plan assets, interest cost, and recognized actuarial gains and losses.

(3)
Other Operating Income for the three months ended March 31, 2009 included a $3.7 million gain on the sale of land and $1.3 million of gains on the disposal of assets primarily associated with the ongoing St. Gabriel, LA facility conversion and expansion project.
 
STOCK-BASED COMPENSATION

Stock-based compensation granted included stock options, performance stock awards, restricted stock awards, and deferred directors’ compensation.  Stock-based compensation expense, including mark-to-market adjustments, totaled $0.8 million and $3.2 million for the three months ended March 31, 2009 and 2008, respectively.

In 2009, we granted 866,250 stock options with an exercise price of $14.28.  The fair value of each stock option granted, which typically vests ratably over three years, but not less than one year, was estimated on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions used:

Grant date
 
2009
   
2008
 
Dividend yield
   
4.26
%
   
4.34
%
Risk-free interest rate
   
2.32
%
   
3.21
%
Expected volatility
   
40
%
   
32
%
Expected life (years)
   
7.0
     
7.0
 
Grant fair value (per option)
 
$
3.85
   
$
4.52
 
Exercise price
 
$
14.28
   
$
20.29
 
 
Dividend yield for 2009 and 2008 was based on a historical average. Risk-free interest rate was based on zero coupon U.S. Treasury securities rates for the expected life of the options. Expected volatility was based on our historical stock price movements, and we believe that historical experience is the best available indicator of the expected volatility. Expected life of the option grant was based on historical exercise and cancellation patterns, and we believe that historical experience is the best estimate of future exercise patterns.

INVESTMENTS – AFFILIATED COMPANIES

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

100% Basis
 
March 31,
2009
   
December 31,
2008
   
March 31,
2008
 
Condensed Balance Sheet Data:
 
($ in millions)
 
Current assets
 
$
50.3
   
$
22.4
   
$
46.2
 
Noncurrent assets
   
105.2
     
107.7
     
111.7
 
Current liabilities
   
21.5
     
19.7
     
27.2
 
Noncurrent liabilities
   
97.5
     
97.5
     
109.7
 

 
Three Months Ended
March 31,
 
 
2009
 
2008
 
Condensed Income Statement Data:
($ in millions)
 
Sales
 
$
52.5
   
$
42.2
 
Gross profit
   
30.5
     
19.9
 
Net income
   
25.6
     
14.4
 
 
 
9
 
The amount of cumulative unremitted earnings of SunBelt was $36.5 million, $12.9 million and $21.0 million at March 31, 2009, December 31, 2008, and March 31, 2008, respectively. We received distributions from SunBelt totaling $1.0 million and zero for the three months ended March 31, 2009 and 2008, respectively.  We have not made any contributions in 2009 or 2008.  
 
In accounting for our ownership interest in SunBelt, we adjust the reported operating results for depreciation expense in order to conform SunBelt’s plant and equipment useful lives to ours.  Beginning January 1, 2007, the original machinery and equipment of SunBelt had been fully depreciated in accordance with our useful asset lives, thus resulting in lower depreciation expense.  The lower depreciation expense increased our share of SunBelt’s operating results by $0.9 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively.  The operating results from SunBelt included interest expense of $1.0 million and $1.1 million for the three months ended March 31, 2009 and 2008, respectively, on the SunBelt Notes.  Finally, we provide various administrative, management and logistical services to SunBelt for which we received fees totaling $2.0 million and $2.1 million for the three months ended March 31, 2009 and 2008, respectively.
 
    Pursuant to a note purchase agreement dated December 22, 1997, SunBelt sold $97.5 million of Guaranteed Senior Secured Notes due 2017, Series O, and $97.5 million of Guaranteed Senior Secured Notes due 2017, Series G. We refer to these notes as the SunBelt Notes. The SunBelt Notes bear interest at a rate of 7.23% per annum, payable semiannually in arrears on each June 22 and December 22.
 
    We have guaranteed the Series O Notes, and PolyOne, our partner in this venture, has guaranteed the Series G Notes, in both cases pursuant to customary guaranty agreements. Our guarantee and PolyOne’s guarantee are several, rather than joint. Therefore, we are not required to make any payments to satisfy the Series G Notes guaranteed by PolyOne. An insolvency or bankruptcy of PolyOne will not automatically trigger acceleration of the SunBelt Notes or cause us to be required to make payments under our guarantee, even if PolyOne is required to make payments under its guarantee. However, if SunBelt does not make timely payments on the SunBelt Notes, whether as a result of a failure to pay on a guarantee or otherwise, the holders of the SunBelt Notes may proceed against the assets of SunBelt for repayment. If we were to make debt service payments under our guarantee, we would have a right to recover such payments from SunBelt.

Beginning on December 22, 2002 and each year through 2017, SunBelt is required to repay $12.2 million of the SunBelt Notes, of which $6.1 million is attributable to the Series O Notes.  Our guarantee of these SunBelt Notes was $54.8 million at March 31, 2009. In the event SunBelt cannot make any of these payments, we would be required to fund the payment on the Series O Notes. In certain other circumstances, we may also be required to repay the SunBelt Notes prior to their maturity. We and PolyOne have agreed that, if we or PolyOne intend to transfer our respective interests in SunBelt and the transferring party is unable to obtain consent from holders of 80% of the aggregate principal amount of the indebtedness related to the guarantee being transferred after good faith negotiations, then we and PolyOne will be required to repay our respective portions of the SunBelt Notes. In such event, any make whole or similar penalties or costs will be paid by the transferring party.

In addition to SunBelt, we have two other investments, which are accounted for under the equity method.   The following table summarized our investments in our equity affiliates:

   
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
   
($ in millions)
 
SunBelt
 
$
8.8
   
$
(3.7
)
 
$
0.9
 
Bay Gas
   
11.0
     
10.7
     
6.2
 
Bleach joint venture
   
12.5
     
12.0
     
11.3
 
Investments in equity affiliates
 
$
32.3
   
$
19.0
   
$
18.4
 

The following table summarized our equity earnings of non-consolidated affiliates:
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
   
($ in millions)
 
SunBelt
 
$
13.6
   
$
8.2
 
Bay Gas
   
0.4
     
0.2
 
Bleach joint venture
   
0.8
     
(0.3
)
Equity earnings of non-consolidated affiliates
 
$
14.8
   
$
8.1
 
10

    We received net settlement of advances of $1.4 million for the three months ended March 31, 2009.  We paid net settlements of advances of $3.1 million for the three months ended March 31, 2008.

PENSION PLANS AND RETIREMENT BENEFITS

Most of our employees participate in defined contribution pension plans.  We provide a contribution to an individual retirement contribution account maintained with the CEOP equal to 5% of the employee’s eligible compensation if such employee is less than age 45, and 7.5% of the employee’s eligible compensation if such employee is age 45 or older.  Expenses of the defined contribution pension plans were $4.0 million and $3.2 million for the three months ended March 31, 2009 and 2008, respectively.
 
    A portion of our bargaining hourly employees continue to participate in our domestic defined benefit pension plans, which are non-contributory final-average-pay or flat-benefit plans. Our funding policy for the defined benefit pension plans is consistent with the requirements of federal laws and regulations. Our foreign subsidiaries maintain pension and other benefit plans, which are consistent with statutory practices. Our defined benefit pension plan provides that if, within three years following a change of control of Olin, any corporate action is taken or filing made in contemplation of, among other things, a plan termination or merger or other transfer of assets or liabilities of the plan, and such termination, merger, or transfer thereafter takes place, plan benefits would automatically be increased for affected participants (and retired participants) to absorb any plan surplus (subject to applicable collective bargaining requirements).
 
    We also provide certain postretirement health care (medical) and life insurance benefits for eligible active and retired domestic employees. The health care plans are contributory with participants’ contributions adjusted annually based on medical rates of inflation and plan experience.

   
Pension Benefits
   
Other Postretirement Benefits
 
   
Three Months Ended
March 31,
   
Three Months Ended
March 31,
 
   
2009
   
2008
   
2009
   
2008
 
Components of Net Periodic Benefit (Income) Cost
 
($ in millions)
   
($ in millions)
 
Service cost
 
$
1.5
   
$
1.7
   
$
0.4
   
$
0.4
 
Interest cost
   
25.3
     
25.1
     
1.0
     
1.1
 
Expected return on plans’ assets
   
(33.2
)
   
(32.7
)
   
     
 
Amortization of prior service cost
   
0.1
     
0.4
     
(0.1
)
   
 
Recognized actuarial loss
   
2.4
     
2.5
     
0.7
     
0.7
 
Net periodic benefit (income) cost
 
$
(3.9
)
 
$
(3.0
)
 
$
2.0
   
$
2.2
 

During the three months ended March 31, 2009, we made a contribution to our foreign defined benefit pension plan of $1.0 million.

INCOME TAXES

At March 31, 2009, our Current Deferred Income Taxes of $62.8 million included refundable income taxes of $2.7 million.  A reclassification totaling $56.3 million from Deferred Income Taxes to Current Deferred Income Taxes was made conforming deferred taxes to the classification of the underlying related assets and liabilities at March 31, 2008.
 
    As of March 31, 2009, we had $50.1 million of gross unrecognized tax benefits, all of which would impact the effective tax rate, if recognized.   The amount of unrecognized tax benefits was as follows:
 
March 31, 2009
 
 
($ in millions)
 
Balance at beginning of year
 
$
50.2
 
Decrease for prior year tax positions
   
(0.1
)
Balance at end of period
 
$
50.1
 

As of March 31, 2009, we believe it is reasonably possible that our total amount of unrecognized tax benefits will decrease by approximately $5.8 million over the next twelve months.  The reduction primarily relates to settlements with tax authorities and the lapse of federal, state, and foreign statutes of limitation.  
 
11
 
    Our federal income tax returns for 2005 to 2007 are open tax years under statute of limitations.  We file in numerous state and foreign jurisdictions with varying statutes of limitation open from 2004 through 2007 depending on each jurisdiction’s unique statute of limitation.  Pioneer filed income tax returns in the U.S., various states, Canada, and various Canadian provinces.  The Pioneer income tax returns are open for examination for the years 2005 and forward.  The Internal Revenue Service (IRS) commenced an audit of Pioneer’s 2006 and 2007 tax years in the fourth quarter of 2008.  We have been notified by the Canada Revenue Agency that it will commence an audit of Pioneer’s Canadian tax returns for its 2005 to 2007 tax years.

DERIVATIVE FINANCIAL INSTRUMENTS
 
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161).  SFAS No. 161 provides companies with requirements for enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on a company’s financial position, financial performance and cash flows.  In accordance with the effective date of SFAS No. 161, we adopted the disclosure provisions of SFAS No. 161 during the three months ended March 31, 2009.
 
    We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities, our ongoing investing and financing activities, and our operations that use foreign currencies. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks.   SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We use hedge accounting treatment for substantially all of our business transactions whose risks are covered using derivative instruments.  In accordance with SFAS No. 133, we designate commodity forward contracts as cash flow hedges of forecasted purchases of commodities and certain interest rate swaps as fair value hedges of fixed-rate borrowings.  We do not enter into any derivative instruments for trading or speculative purposes.

    Energy costs, including electricity used in our Chlor Alkali Products segment, and certain raw materials and energy costs, namely copper, lead, zinc, electricity, and natural gas used primarily in our Winchester segment, are subject to price volatility. Depending on market conditions, we may enter into futures contracts and put and call option contracts in order to reduce the impact of commodity price fluctuations.  The majority of our commodity derivatives expire within one year.  Those commodity contracts that extend beyond one year correspond with raw material purchases for long-term fixed-price sales contracts.

We enter into forward sales and purchase contracts to manage currency risk resulting from purchase and sale commitments denominated in foreign currencies (principally Australian dollar and Canadian dollar). All of the currency derivatives expire within one year and are for United States dollar equivalents. Our foreign currency forward contracts did not meet the criteria to qualify for hedge accounting.

In 2001 and 2002, we entered into interest rate swaps on $75 million of our underlying fixed-rate debt obligations, whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates.  The counterparty to these agreements is Citibank, N.A., a major financial institution.  In January 2009, we entered into a $75 million fixed interest rate swap with equal and opposite terms as the $75 million variable interest rate swaps on the 9.125%  senior notes due 2011 (2011 Notes).  We have agreed to pay a fixed rate to a counterparty who, in turn, pays us variable rates.  The counterparty to this agreement is Bank of America, a major financial institution.  The result was a gain of $8.5 million on the $75 million variable interest rate swaps, which will be recognized through 2011.  In January 2009, we de-designated our $75 million interest rate swaps that had previously been designated as fair value hedges.  The $75 million variable interest rate swaps and the $75 million fixed interest rate swap do not meet the criteria for hedge accounting.  All changes in the fair value of these interest rate swaps are recorded currently in earnings.

Cash flow hedges
 
SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value.  For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of Other Comprehensive Loss until the hedged item is recognized into earnings.  Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings.
 
 
 
12
 
We had the following notional amount of outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
 
   
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
   
($ in millions)
 
Copper
 
$
41.0
   
$
49.8
   
$
27.2
 
Zinc
   
3.5
     
5.4
     
4.6
 
Lead
   
17.4
     
26.8
     
38.1
 
Natural gas
   
6.2
     
2.0
     
0.4
 

    As of March 31, 2009, the counterparty to $51.1 million of these commodity forward contracts is Wells Fargo, a major financial institution. 

We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, and natural gas to provide a measure of stability in managing our exposure to price fluctuations associated with forecasted purchases of raw materials and energy costs used in the company's manufacturing process.  At March 31, 2009, we had open positions in futures contracts through 2013. If all open futures contracts had been settled on March 31, 2009, we would have recognized a pretax loss of $18.3 million.

If commodity prices were to remain at the levels they were at March 31, 2009, approximately $12.9 million of deferred losses would be reclassified into earnings during the next twelve months.  The actual effect on earnings will be dependent on actual commodity prices when the forecasted transactions occur.  
 
Fair value hedges
 
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged items (fixed-rate borrowings) in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps.  As of March 31, 2009, December 31, 2008 and March 31, 2008, the total notional amount of our interest rate swaps designated as fair value hedges were $26.6 million, $101.6 million and $101.6 million, respectively.  In January 2009, we de-designated our $75 million interest rate swaps that had previously been designated as fair value hedges.
 
    We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. These interest rate swaps are treated as fair value hedges. The accounting for gains and losses associated with changes in fair value of the derivative and the effect on the condensed financial statements will depend on the hedge designation and whether the hedge is effective in offsetting changes in fair value of cash flows of the asset or liability being hedged.  We have entered into $26.6 million of such swaps, whereby we agree to pay variable rates to a counterparty who, in turn, pays us fixed rates.  The counterparty to these agreements is Citibank, N.A., a major financial institution.  In all cases, the underlying index for the variable rates is six-month London InterBank Offered Rate (LIBOR). Accordingly, payments are settled every six months and the terms of the swaps are the same as the underlying debt instruments. 
 
The fair values of derivative instruments designated as hedging instruments were as follows:
 
 
Asset Derivatives
 
Liability Derivatives
 
     
Fair Value
     
Fair Value
 
           
($ in millions)
                 
($ in millions)
       
 
Balance
Sheet
Location
 
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
Balance
Sheet
Location
 
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
Interest rate contracts
Other assets
 
$
2.7
   
$
11.3
   
$
10.0
 
Long-term debt
 
$
10.8
   
$
11.3
   
$
10.0
 
Commodity contracts
Other current assets
   
     
     
8.2
 
Accrued liabilities
   
18.6
     
40.9
     
1.4
 
     
$
2.7
   
$
11.3
   
$
18.2
     
$
29.4
   
$
52.2
   
$
11.4
 

 
13
 
    The fair values of derivative instruments not designated as hedging instruments were as follow:
 
 
Asset Derivatives
 
Liability Derivatives
 
     
Fair Value
     
Fair Value
 
 
Balance
Sheet
Location
 
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
Balance
Sheet
Location
 
March 31, 2009
   
December 31, 2008
   
March 31, 2008
 
           
($ in millions)
                 
($ in millions)
       
Interest rate contracts
Other assets
 
$
8.5
   
$
   
$
 
Other liabilities
 
$
0.3
   
$
   
$
 
Commodity contracts
Other current assets
 
 
   
 
   
 
0.3
 
Accrued liabilities
   
     
     
 
Foreign currency contracts
Other current assets
   
     
     
 
Accrued liabilities
   
     
     
0.2
 
     
$
8.5
   
$
   
$
0.3
     
$
0.3
   
$
   
$
0.2
 
Total Derivatives(1)
   
$
11.2
   
$
11.3
   
$
18.5
     
$
29.7
   
$
52.2
   
$
11.6
 

(1)      Does not include the impact of cash collateral provided to counterparties.
 
The effects of derivative instruments on the Condensed Statements of Income were as follows:

     
Amount of Gain (Loss)
 
     
Three Months Ended March 31,
 
 
Location of Gain (Loss)
 
2009
   
2008
 
Derivatives – Cash Flow Hedges
   
($ in millions)
 
Recognized in Other Comprehensive Loss (Effective Portion)
———
 
$
7.7
   
$
9.7
 
Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
Cost of Goods Sold
 
$
(15.1
)
 
$
3.6
 
Recognized in Income (Ineffective Portion)
Cost of Goods Sold
   
(0.4
)
   
(0.2
)
     
$
(15.5
)
 
$
3.4
 
Derivatives – Fair Value Hedges
                 
Interest rate contracts
Interest Expense
 
$
0.9
   
$
0.3
 
     
$
0.9
   
$
0.3
 
                   
Derivatives Not Designated as Hedging Instruments
                 
Interest rate contracts
Interest Expense
 
$
0.1
   
$
 
Foreign currency contracts
Selling and Administration
   
     
(0.6
)
     
$
0.1
   
$
(0.6
)

Credit risk and collateral

By using derivative instruments, we are exposed to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair-value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties.  We monitor our positions and the credit ratings of our counterparties and we do not anticipate non-performance by the counterparties.
 
 
14
 
Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceed a specific threshold.  If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability.  As of March 31, 2009, December 31, 2008 and March 31, 2008, the amounts recognized in Accrued Liabilities for the right to reclaim cash collateral totaled $6.5 million, $22.0 million, and $0.1 million, respectively.  In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.  A reclassification totaling $22.0 million and $0.1 million from Other Current Assets to Accrued Liabilities was made conforming cash collateral to the classification of the related derivative instruments at December 31, 2008 and March 31, 2008, respectively.

FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS No. 157).  This statement did not require any new fair value measurements, but rather, it provided enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The changes to current practice resulting from the application of this statement related to the definition of fair value, the methods used to estimate fair value, and the requirement for expanded disclosures about estimates of fair value. This statement became effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The effective date for this statement for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, has been delayed by one year.  Nonfinancial assets and nonfinancial liabilities that were impacted by this deferral included assets and liabilities initially measured at fair value in a business combination, and intangible assets and goodwill tested annually for impairment.  We adopted the provisions of SFAS No. 157 related to financial assets and financial liabilities on January 1, 2008.  The partial adoption of this statement did not have a material impact on our financial statements.  We adopted the remaining provisions of SFAS No. 157 related to nonfinancial assets and liabilities on January 1, 2009.  The adoption of the remaining provisions of this statement did not have a material impact on our financial statements.
 
In April 2009, the FASB issued Staff Position SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (SFAS No. 157-4).  This position provided guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157.  SFAS No. 157-4 related to determining fair values when there is no active market or where the price inputs being used represent distressed sales.  SFAS No. 157-4, which reaffirms SFAS No. 157, stated that the objective of fair value measurement is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions.  This position will become effective for interim and fiscal years ending after June 15, 2009, with early adoption permitted.  We adopted this position as of March 31, 2009.  The adoption of this position did not have a material effect on our financial statements.

Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.
 
Assets and liabilities recorded at fair value in the condensed balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
 
15
 
Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
        Determining which hierarchical level an asset or liability falls within requires significant judgment.  We evaluate our hierarchy disclosures each quarter.  The following table summarizes the financial instruments measured at fair value in the Condensed Balance Sheet as of March 31, 2009:

 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
   
Total
 
Assets
($ in millions)
 
Interest rate swaps
  $     $ 11.2     $     $ 11.2  
Liabilities
                               
Interest rate swaps
  $     $ 11.1     $     $ 11.1  
Commodity forward contracts
    6.6       12.0             18.6  

Short-term investments
 
We classified our marketable securities as available-for-sale which were reported at fair market value.  Unrealized gains and losses, to the extent such losses are considered temporary in nature, are included in Accumulated Other Comprehensive Loss, net of applicable taxes.  At such time as the decline in fair market value and the related unrealized loss is determined to be a result of impairment of the underlying instrument, the loss is recorded as a charge to earnings.  Fair values for marketable securities are based upon prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities or prices obtained from independent third-party pricing services.  The third-party pricing services employ various models that take into consideration such market-based factors as recent sales, risk-free yield curves, prices of similarly rated bonds, and direct discussions with dealers familiar with these types of securities.

As of March 31, 2008, we held corporate debt securities totaling $26.6 million of par value with a fair value of $26.1 million.  For the three months ended March 31, 2008, a temporary unrealized after-tax loss of $0.3 million ($0.5 million pretax) was recorded in Accumulated Other Comprehensive Loss.   As of March 31, 2008, we concluded no other-than-temporary impairment losses had occurred.  The AA-rated issuer of these debt securities had funded all redemptions at par and maintained short-term A1/P2 credit ratings.  We entered into this structured investment vehicle in March 2006 as part of an approved cash management portfolio.  Given our liquidity and capital structure, we had the ability to hold these debt securities until maturity on April 1, 2009.
 
    Through September 30, 2008, the issuer of these debt securities had continued to fund all redemptions at par but was downgraded to short-term A3/P2 credit ratings.  On October 1, 2008, the issuer of these debt securities announced it would cease trading and appoint a receiver as a result of financial market turmoil.  The decline in the market value of the assets supporting these debt securities negatively impacted the liquidity of the issuer.  On October 1, subsequent to the issuer’s announcement, the Moody’s rating for these debt securities was downgraded from A3 to Ca.

As of September 30, 2008, we continued to hold corporate debt securities totaling $26.6 million of par value.  We determined that these debt securities had no fair market value due to the actions taken by the issuer, turmoil in the financial markets, the lack of liquidity of the issuer, and the lack of trading in these debt securities.  These factors led management to believe the recovery of the asset value, if any, was highly unlikely.

Because of the unlikelihood that these debt securities would recover in value, we recorded an after-tax impairment loss of $26.6 million in Other (Expense) Income for the three months ended September 30, 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.

Interest rate swaps

The fair value of the interest rate swaps were valued using the “income approach” valuation technique.  This method used valuation techniques to convert future amounts to a single present amount.  The measurement was based on the value indicated by current market expectations about those future amounts.  We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optional levels.

 
 
16
 
Commodity forward contracts
 
The fair value of the commodity forward contracts were valued primarily based on prices and other relevant information observable in market transactions involving identical or comparable assets or liabilities including both forward and spot prices for commodities.  We use commodity forward contracts for certain raw materials and energy costs such as copper, zinc, lead, and natural gas to provide a measure of stability in managing our exposure to price fluctuations.
 
Financial Instruments
 
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated fair values due to the short-term maturities of these instruments. The fair value of our long-term debt was determined based on current market rates for debt of the same risk and maturities. At March 31, 2009, December 31, 2008, and March 31, 2008, the estimated fair value of debt was $238.9 million, $221.0 million and $261.2 million, respectively, which compares to debt recorded on the balance sheet of $253.4 million, $252.4 million and $252.7 million, respectively.  The lower fair value of debt as of March 31, 2009 and December 31, 2008 was due to the adverse conditions in the overall credit and financial markets experienced in 2008.  
 
SFAS No. 157 requires separate disclosure of assets and liabilities measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis.   Nonfinancial assets measured at fair value on a nonrecurring basis are intangible assets and goodwill, which are reviewed annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred.  No circumstances or events happened that indicated impairment may have occurred for the three months ended March 31, 2009; therefore, no measurement at fair value was required for these nonfinancial assets.

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

Chlor Alkali Products segment income of $68.7 million improved 3% compared with the three months ended March 31, 2008, which reflects record ECU pricing in the business, offset by lower volumes.  Chlor Alkali Products realized a continuation of the weak demand that we experienced in the fourth quarter of 2008.  Operating rates in Chlor Alkali Products for the three months ended March 31, 2009 were 65%, which were slightly lower than the three months ended December 31, 2008 level of 67%.  The Chlor Alkali Products earnings for the three months ended March 31, 2009 were unfavorably impacted by maintenance and logistic costs associated with a planned ten-day maintenance outage during the quarter at our largest manufacturing site in McIntosh, AL, including the SunBelt facility, and the outage at our Henderson, NV site, which had been shutdown due to equipment failure from early December 2008 until February. In addition, we did not operate our St. Gabriel, LA facility during the three months ended March 31, 2009.

Winchester segment income of $17.0 million for the three months ended March 31, 2009 represented the highest level of quarterly earnings in its history.  Winchester’s results reflected the continuation of the stronger than normal demand that began in the fourth quarter of 2008 and improved pricing.

 
 
17
 
Earnings for the three months ended March 31, 2009 included $5.0 million of pretax gains associated with the sale of land and other asset disposals.

Consolidated Results of Operations
<
   
Three Months Ended
March 31,
 
   
2009
   
2008
 
   
($ in millions, except per share data)
 
Sales
 
$
400.6
   
$
399.1
 
Cost of Goods Sold
   
306.2
     
314.0
 
Gross Margin
   
94.4
     
85.1
 
Selling and Administration
   
39.2
     
33.3
 
Other Operating Income
   
5.5
     
0.6
 
Operating Income
   
60.7
     
52.4
 
Earnings of Non-consolidated Affiliates
   
14.8
     
8.1
 
Interest Expense
   
1.6
     
4.5
 
Interest Income
   
0.5
     
2.8
 
Other Income
   
     
0.1
 
Income before Taxes
   
74.4
     
58.9