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OLN > SEC Filings for OLN > Form 10-Q on 24-Jul-2012All Recent SEC Filings

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Form 10-Q for OLIN CORP


24-Jul-2012

Quarterly Report


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. Chlor Alkali Products 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 the capacity in our Chlor Alkali Products business, can lead to 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

On July 17, 2012, we entered into a definitive agreement to acquire privately-held KA Steel, on a cash free, debt free basis, for $328 million in cash, subject to certain post-closing adjustments. KA Steel, headquartered in Lemont, IL, is one of the largest distributors of caustic soda in North America and one of the leading bleach manufacturers in the Midwest. The closing of the acquisition is conditioned upon regulatory approval and other customary closing conditions and is expected to occur by the end of the third quarter of 2012. We expect to finance the acquisition using a combination of cash on hand and drawing under our $265 million senior revolving credit facility.

Chlor Alkali Products' segment income was $75.0 million and $149.4 million for the three and six months ended June 30, 2012, respectively. Chlor Alkali Products' segment income was higher than the comparable periods in the prior year, as a result of improvements in ECU pricing and increased contributions from bleach and hydrochloric acid. Chlor Alkali Products' second quarter segment income was consistent with the first quarter of 2012 level of $74.4 million, as ECU netbacks and chlorine and caustic soda volumes declined slightly, offset by increased bleach volumes. Operating rates in Chlor Alkali Products for the second quarter of 2012 were 79%, which were lower than the first quarter of 2012 level of 80% and the second quarter of 2011 level of 85%.

Second quarter of 2012 ECU netbacks, including SunBelt, of approximately $575 were 3% higher than the second quarter of 2011 ECU netbacks of $560, including SunBelt, due to higher caustic soda prices, partially offset by lower chlorine prices and higher freight costs per ECU shipped. The second quarter 2012 ECU netback declined slightly from the first quarter 2012 level of approximately $585, primarily due to higher freight costs. ECU netbacks in the third quarter of 2012 are forecast to be slightly lower than the second quarter of 2012 as a result of lower chlorine prices. In the second quarter of 2012, a caustic soda price increase was announced totaling $60 per ton. While the success of the caustic soda price increase is not yet known, the majority of the benefit, if realized, would impact fourth quarter 2012 results.


Winchester segment income was $11.9 million and $22.7 million for the three and six months ended June 30, 2012, respectively. The decrease in segment income for the six months ended June 30, 2012 reflects the impact of higher commodity metals and other material costs, higher manufacturing costs and transition costs associated with our ongoing relocation of the centerfire operations to Oxford, MS, partially offset by higher selling prices.

Capital spending of $145.8 million for the six months ended June 30, 2012 included $73.6 million for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology, $28.8 million for the construction of low salt, high strength bleach facilities at our McIntosh, AL; Henderson, NV; and Niagara Falls, NY chlor alkali sites and $12.8 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations. We completed the first low salt, high strength bleach facility at McIntosh, AL in the first quarter of 2012.

On April 27, 2012, we entered into a new $265 million five-year senior revolving credit facility, which replaced the $240 million senior revolving credit facility and a $25 million letter of credit facility. The new credit facility will expire in April 2017. Borrowing options and restrictive covenants are similar to those of our previous $240 million senior revolving credit facility. The $265 million senior revolving credit facility includes a $110 million letter of credit subfacility and a $50 million Canadian subfacility.

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