OLN

OLIN Corp. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Olin Corporation, a manufacturer operating in two primary segments: Chlor Alkali Products (chlorine, caustic soda, and related chemicals) and Winchester (sporting and military ammunition). The report covers the three and nine months ended September 30, 2009. The company is a large accelerated filer incorporated in Virginia.

Key Financial Metrics

Margins (9 Months 2009): Gross Margin was 21% of sales ($246.0M); Operating Margin was 12.4% ($146.4M).

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 11% year-over-year for the nine months ended September 30, 2009. The Chlor Alkali segment saw a 23% sales drop due to lower volumes (down 27%) and lower ECU netbacks. Conversely, the Winchester segment sales increased 20% driven by higher volumes.
• Profitability: Net income increased slightly ($3.4M) for the nine-month period despite lower sales, primarily due to significant non-operating items. Operating income decreased 21% year-over-year.
• Environmental Recoveries: Results were significantly boosted by $45.1 million in recoveries from third parties for environmental costs incurred in prior periods. Without these recoveries, operating results would have been materially lower.
• Debt Issuance: Long-term debt increased from $252.4 million (Dec 31, 2008) to $399.6 million (Sep 30, 2009) following the issuance of $150 million in 8.875% Senior Notes in August 2009 to strengthen liquidity.
• Cash Flow: Operating cash flow improved dramatically to $100.2 million for the nine months ended September 30, 2009, compared to $4.1 million in the prior year period, driven by better working capital management and lower tax payments.

Guidance, Outlook, and Risks

• Q4 2009 Outlook: Management projects Q4 2009 net income in the range of $0.15 per diluted share. This forecast includes an expected $35 million pretax recovery from third parties for environmental costs.
• Segment Outlook:
  • Chlor Alkali: Earnings expected to be similar to Q3 2009. ECU netbacks are expected to improve in Q4 due to price increases, though caustic soda prices may decline further before realizing announced increases in Q1 2010. Operating rates expected to be 70-75%.
  • Winchester: Q4 results expected to exceed Q4 2008 but be lower than Q3 2009 due to seasonal demand weakness.
• Capital Spending: Full-year 2009 capital spending is anticipated to be approximately $150 million, with 2010 spending projected between $70 million and $80 million.
• Regulatory Risk: Legislation introduced in Congress proposes banning mercury cell technology for chlor-alkali production. Olin operates two such facilities (approx. 18% of capacity). The impact is currently uncertain pending legislative action.
• Environmental Contingencies: Total reserves for environmental liabilities stand at $167.1 million. Future charges are expected to be material, estimated at $25 million for 2009 excluding recoveries.

Investor Verification Checklist

• Environmental Recoveries: Verify the realizability and timing of the $45.1 million in environmental recoveries recognized in 2009 and the anticipated $35 million in Q4, as these significantly distort operating performance.
• Chlor Alkali Pricing: Monitor the realization of announced price increases for chlorine and caustic soda, noting the lag time mentioned for caustic soda (expected Q1 2010).
• Mercury Cell Legislation: Track the progress of the proposed ban on mercury cell technology and its potential capital expenditure impact on Olin's two affected facilities.
• Debt Service: Assess the impact of the new $150 million 8.875% Senior Notes on future interest expense and cash flow coverage.
• Winchester Seasonality: Confirm the extent of seasonal demand decline in the Winchester segment for Q4 2009 as projected by management.