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OLN > SEC Filings for OLN > Form 10-Q on 29-Oct-2012All Recent SEC Filings

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Form 10-Q for OLIN CORP


29-Oct-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 three business segments: Chlor Alkali Products, Chemical Distribution and Winchester. Chlor Alkali Products and Winchester are both 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 and Chemical Distribution businesses are commodity businesses 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

KA Steel Acquisition

On August 22, 2012, we acquired privately-held KA Steel, on a debt free basis, for $338.5 million in cash, subject to certain post-closing adjustments. As of the date of acquisition, KA Steel had cash and cash equivalents of $26.2 million. The price paid is subject to a customary working capital adjustment. KA Steel is one of the largest distributors of caustic soda in North America and manufacturers and sells bleach in the Midwest. As part of the acquisition, we expensed $8.3 million of acquisition costs in the three and nine months ended September 30, 2012.

For segment reporting purposes, KA Steel comprises the newly created Chemical Distribution segment. Our results for the three and nine months ended September 30, 2012 include KA Steel sales of $47.6 million and $1.9 million of segment income, which includes depreciation and amortization expense of $1.7 million primarily associated with the acquisition fair valuing of KA Steel.

As a result of acquiring KA Steel, we anticipate realizing approximately $35 million of annual synergies at the end of three years. These synergies include opportunities to sell additional volumes of products we produce such as bleach, hydrochloric acid and potassium hydroxide through KA Steel and to optimize freight cost and logistics assets between us and KA Steel. Also, under the terms of the acquisition, both parties agreed to make an election under Section 338(h)(10) of the U.S. IRC that is expected to result in cash tax benefits to us that have a net present value of approximately $60 million.


Financing

On August 22, 2012, we sold $200 million of 2022 Notes with a maturity of August 15, 2022. The 2022 Notes were issued at par value. Interest will be paid semi-annually beginning on February 15, 2013. The acquisition of KA Steel was partially financed with proceeds of $196.0 million, after expenses of $4.0 million, from the 2022 Notes.

Other Highlights

Chlor Alkali Products' segment income was $59.5 million and $208.9 million for the three and nine months ended September 30, 2012, respectively. Chlor Alkali Products' third quarter 2012 segment income decreased 22% compared to the third quarter of 2011. Segment income was lower than the comparable period in the prior year, as a result of lower ECU prices and decreased chlorine and caustic soda volumes. Third quarter 2012 also included $4.9 million of costs associated with two plant startups. Operating rates in Chlor Alkali Products for the third quarter of 2012 were 83%, which was higher than the second quarter of 2012 level of 79% but lower than third quarter of 2011 level of 85%.

Third quarter of 2012 ECU netbacks of approximately $560 were 6% lower than the third quarter of 2011 ECU netbacks of $595, and 3% lower than the second quarter of 2012 level of approximately $575. The decline from both periods was due to lower chlorine prices. ECU netbacks in the fourth quarter of 2012 are forecast to be higher than the third quarter of 2012 reflecting benefits from a portion of the caustic soda price increase that was announced in the second quarter totaling $60 per ton. In the third quarter of 2012, an additional caustic soda price increase was announced of $70 per ton. While the success of the $70 per ton caustic soda price increase is not yet known, the majority of the benefit, if realized, would impact first quarter 2013 results.

Winchester segment income was $16.0 million and $38.7 million for the three and nine months ended September 30, 2012, respectively. The increase in third quarter and year to date segment income compared to the comparable periods last year reflects the impact of higher selling prices and lower commodity metals costs, partially offset by higher other material costs, higher manufacturing costs and transition costs associated with our ongoing relocation of the centerfire operations to Oxford, MS.

During the third quarter, we were notified by the U.S. Army that our joint venture with BAE Systems, named U.S. Munitions, was not the successful bidder for the Lake City Army Ammunition plant contract. The Lake City Army Ammunition Plant is the U.S. Army's primary manufacturing location for small caliber ammunition.

Capital spending of $210.8 million for the nine months ended September 30, 2012 included $101.0 million for the conversion of our Charleston, TN facility from mercury cell technology to membrane technology, $46.9 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 $15.2 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations. We completed low salt, high strength bleach facilities at McIntosh, AL and Niagara Falls, NY in the first and third quarters of 2012, respectively. Also, the first of the two new membrane cell rooms at Charleston, TN was successfully started up in the third quarter.


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