OLN

OLIN Corp. 10-Q Summary: Period Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the six months ended June 30, 2004, for Olin Corporation. The company operates in three primary segments: Metals, Chlor Alkali Products, and Winchester. The reporting period was characterized by a significant equity raise, a major voluntary pension contribution, corporate office relocation restructuring, and a fire at the East Alton hot mill facility.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 27% year-over-year to $1,001.7 million. The Metals segment drove this growth with a 48% sales increase, attributed to a 64% rise in copper prices and a 15% volume increase. Chlor Alkali and Winchester sales remained relatively flat.
• Profitability: Net income turned positive ($13.3 million) compared to a net loss of $30.5 million in the prior year. This improvement was aided by a $14.3 million increase in "Other Income" (gains on asset sales and contract settlements) and reduced restructuring charges ($8.9 million in 2004 vs. $29.0 million in 2003).
• Margins: Gross margin percentage declined from 12% in 2003 to 9% in 2004. This was due to lower selling prices for Chlor Alkali products and the higher cost of goods sold associated with increased metal values in the Metals segment.
• Cash Flow: Operating cash flow was negative $208.8 million, primarily due to a $125 million voluntary pension contribution and a $40 million tax payment related to prior periods. Excluding these items, operating cash usage was driven by a higher investment in working capital (receivables) due to increased sales.

Guidance, Outlook, and Risks

• Outlook: Management expects third-quarter 2004 earnings to be in the range of $0.20 per diluted share. Chlor Alkali and Winchester profits are projected to increase significantly. Metals earnings are expected to be slightly lower than Q2 (excluding the fire impact) due to seasonal shutdowns but significantly higher than Q2 2003.
• Restructuring: The company is relocating corporate offices from Norwalk, CT, to East Alton, IL, and Clayton, MO. This is expected to incur one-time costs of approximately $12 million in 2004 but will yield $6 million in annual savings.
• Environmental Liabilities: Reserves for environmental remediation stand at $96.9 million. The company estimates full-year 2004 charges to income for environmental activities will be in the $25 million range, up from $20 million in 2003.
• Unusual Items:
  • Fire: A fire at the East Alton hot mill in April 2004 resulted in approximately $4.7 million in pretax costs.
  • Asset Sales: The sale of the Olin Aegis business and an insurance investment generated a $7.5 million pretax gain and $19.7 million in proceeds.
  • Equity Raise: In February 2004, the company issued 10 million shares for $177.7 million in net proceeds, primarily used to fund the pension contribution.

Investor Verification Checklist

• Pension Funding: Verify the sustainability of the $125 million voluntary pension contribution and the projected $40-$50 million contribution for 2005.
• Environmental Exposure: Monitor the $96.9 million environmental reserve and the potential for additional charges given the uncertainty of remediation costs.
• Commodity Sensitivity: Assess the impact of copper price volatility on the Metals segment's revenue and gross margin, as well as electricity costs on the Chlor Alkali segment.
• Restructuring Execution: Track the progress of the corporate office relocation and the realization of the projected $6 million annual savings.
• Debt Structure: Review the new $160 million senior revolving credit facility entered into on July 30, 2004, and the company's leverage ratio (debt to total capitalization decreased to 46%).