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| OLN > SEC Filings for OLN > Form 10-Q on 28-Jul-2009 | All Recent SEC Filings |
28-Jul-2009
Quarterly Report
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.
During the second quarter of 2009, a bill was introduced in the United States House of Representatives 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. A companion bill was introduced in the United States Senate in July 2009. 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 $47.6 million and $116.3 million for the three and six months ended June 30, 2009, respectively. Chlor Alkali Products continued to experience the weak demand that began in the fourth quarter of 2008. Operating rates in Chlor Alkali Products for the three months ended June 30, 2009 and 2008 were 70% and 89%, respectively, and for the six months ended June 30, 2009 and 2008 were 67% and 86%, respectively. Volumes for chlorine and caustic soda decreased 32% and 31% for the three and six months ended June 30, 2009, respectively, compared to the prior year.
While second quarter 2009 ECU netbacks of $585 were similar to levels in the second quarter of 2008, the pricing dynamics in the North American market have changed. 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 through the second 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 have continued into the third quarter of 2009. We expect to begin realizing the 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.
Winchester segment income was $19.1 million and $36.1 million for the three and six months ended June 30, 2009, respectively. Winchester segment income for the three and six months ended June 30, 2009, which represented the highest level of earnings in its history, improved 101% and 85%, 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 and improved pricing.
Earnings for the six months ended June 30, 2009 included $4.6 million of pretax gains associated with the sale of land and other asset disposals.
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