OLIN Corp. 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Olin Corporation, a manufacturer operating in three segments: Chlor Alkali Products, Metals, and Winchester. The report covers the three and six months ended June 30, 2006. The company is a large accelerated filer incorporated in Virginia.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 30, 2006 | 6 Months Ended June 30, 2006 |
|---|---|---|
| Sales | $826.4 | $1,551.5 |
| Net Income | $33.0 | $66.7 |
| Diluted EPS | $0.45 | $0.92 |
| Operating Income | $40.7 | $84.2 |
| Cash and Equivalents (End of Period) | $117.1 | $117.1 |
| Total Debt (Current + Long-Term) | $252.3 | $252.3 |
| Net Operating Cash Flow | Not provided for 3 months | $(80.8) |
Note: Gross margin for the six months ended June 30, 2006, was $191.4 million (12.3% of sales), compared to $175.2 million (15.2% of sales) in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 39% ($232.7 million) for the quarter and 34% ($396.9 million) for the six months compared to 2005. This was driven primarily by higher metal prices in the Metals segment and higher Electrochemical Unit (ECU) prices in Chlor Alkali.
- Profitability: Net income for the quarter was flat ($33.0M vs $32.1M), while six-month net income decreased slightly ($66.7M vs $69.3M). Operating income declined for both periods due to higher operating costs, pension expenses, and environmental provisions.
- Restructuring: The company recorded a $15.7 million pretax restructuring charge in the first half of 2006 related to the closure of the Waterbury Rolling Mills facility. This was partially offset by a $13.5 million LIFO inventory liquidation gain.
- Cash Flow: Net cash provided by operating activities turned negative at $(80.8) million for the six months ended June 30, 2006, compared to $75.7 million in 2005. This was primarily due to a $94.7 million increase in working capital (driven by higher metal prices) and a $69.0 million increase in cash tax payments, including a $44.0 million IRS settlement payment.
- Segment Performance:
- Chlor Alkali: Sales up 7% (quarter) and 14% (six months); Income up 4% and 14% respectively.
- Metals: Sales up 61% (quarter) and 50% (six months); Income down 35% (quarter) but up 8% (six months) due to the LIFO gain.
- Winchester: Sales up 7% (quarter) and 7% (six months); Income improved significantly from breakeven to $3.3M (quarter) and $3.4M to $7.2M (six months).
Guidance, Outlook, and Risks
- Q3 2006 Outlook: Management expects earnings in the range of $0.60 per diluted share for the quarter ending September 30, 2006. This includes an anticipated $21.0 million reduction in income tax expense related to the finalized IRS settlement.
- Segment Outlook: Chlor Alkali earnings are expected to decline in Q3 due to lower ECU prices and higher electricity costs. Metals income is expected to improve as restructuring savings are realized. Winchester is expected to improve due to seasonal factors.
- Subsequent Events:
- Debt Exchange: On July 28, 2006, the company issued $125 million of 6.75% senior notes due 2016 and paid an $18.8 million premium to exchange $125 million of 9.125% notes due 2011.
- Tax Settlement: Finalized a settlement with the IRS regarding capital losses from 1997-2001. A $44.0 million payment was made in May 2006.
- Risks and Contingencies:
- Environmental: Reserves for environmental expenditures total $100.2 million. Annual cash outlays are projected between $50 million and $70 million.
- Pension: Full-year 2006 pension expense is projected at $41 million, a significant increase from $26.2 million in 2005, due to lower discount rates and amortization of prior losses.
- Market Risk: Exposure to commodity price volatility (copper, zinc, chlorine) and interest rate fluctuations. The company uses futures and interest rate swaps to hedge these risks.
Investor Verification Checklist
- Verify the impact of the $44.0 million IRS tax payment on Q3 2006 earnings and the expected $21.0 million tax benefit.
- Monitor the execution of the Metals restructuring (Waterbury closure) and the realization of the projected $9.0 million to $10.0 million in annual savings.
- Assess the sustainability of Chlor Alkali margins given the volatility in ECU prices and rising electricity costs.
- Review the $100.2 million environmental reserve and potential for additional charges as site investigations progress.
- Confirm the company's ability to service debt following the July 2006 debt exchange and the reduction in cash reserves.