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OLN > SEC Filings for OLN > Form 10-Q on 29-Jul-2013All Recent SEC Filings

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Form 10-Q for OLIN CORP


Quarterly Report

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

Business Background

Our 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

Chlor Alkali Products' segment income was $50.2 million and $108.7 million for the three and six months ended June 30, 2013, respectively. Chlor Alkali Products' segment income was lower than the comparable periods in the prior year as a result of higher operating costs associated with planned maintenance outages and higher electricity costs due to increased natural gas prices, lower product prices, primarily hydrochloric acid, and decreased volumes. Chlor Alkali Products' second quarter segment income declined sequentially from the first quarter of 2013 level of $58.5 million due to higher operating costs associated with planned maintenance outages, plant start-ups and higher electricity costs due to increased natural gas prices, partially offset by higher product prices. Our operating rate for the three months ended June 30, 2013 was 84%, which reflected the capacity reductions that occurred in fourth quarter of 2012, compared to the operating rate of 79% for the three months ended June 30, 2012.

Second quarter of 2013 ECU netbacks of approximately $575 were consistent with the second quarter of 2012 ECU netbacks and 2% higher than the first quarter of 2013 ECU netbacks of approximately $565. The increase from first quarter was due to higher chlorine prices. ECU netbacks in the third quarter of 2013 are forecast to be higher than the second quarter of 2013 reflecting some realization from the caustic soda price increase that was announced in the first quarter of 2013 totaling $50 per ton. In the second quarter of 2013, an additional caustic soda price increase of $40 per ton was announced. While the success of the $40 per ton caustic soda price increase is not yet known, the majority of the benefit, if realized, would impact fourth quarter 2013 results. Chemical Distribution segment income was $2.2 million and $6.3 million for the three and six months ended June 30, 2013, respectively, which includes depreciation and amortization expense of $3.9 million and $7.7 million, respectively, primarily associated with the acquisition fair valuing of KA Steel. As a result of acquiring KA Steel in August of 2012, 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 caustic soda, bleach, hydrochloric acid and potassium hydroxide through KA Steel and to optimize freight cost and logistics assets between our Chlor Alkali Products segment and KA Steel.

Winchester segment income was $37.1 million and $68.4 million for the three and six months ended June 30, 2013, respectively. The increase in second quarter and year to date segment income compared to the comparable periods last year reflect the impact of increased volumes due to the continuation of the stronger than normal demand that began in the fourth quarter of 2012, improved selling prices and decreased costs, including the impact of decreased costs associated with our new centerfire operation in Oxford, MS.

In January 2013 we repaid the $11.4 million 6.5% Senior Notes (2013 Notes), which became due. These were redeemed using cash.

Capital spending of $54.6 million for the six months ended June 30, 2013 included $9.3 million to complete the low salt, high strength bleach facility and the hydrochloric acid expansion project at our Henderson, NV chlor alkali site and $3.5 million for our ongoing relocation of our Winchester centerfire ammunition manufacturing operations.

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