OLN

OLIN Corp 10-Q Summary: Period Ended June 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 reporting period covers the three and six months ended June 30, 2009. The company is a large accelerated filer incorporated in Virginia.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales: Consolidated sales decreased 11% ($45.3 million) for the quarter and 5% ($43.8 million) for the six months compared to 2008.
  • Chlor Alkali: Sales dropped 22% (quarter) and 15% (six months) due to a 32% and 31% decline in shipment volumes, respectively, driven by weak demand.
  • Winchester: Sales increased 21% (quarter) and 21% (six months) due to higher volumes and improved pricing.
• Profitability: Net income decreased 22% for the quarter but increased 2% for the six months compared to the prior year.
  • Chlor Alkali Income: Decreased 32% (quarter) and 15% (six months) due to lower volumes and higher operating costs, partially offset by higher ECU netbacks in the six-month period.
  • Winchester Income: Increased 101% (quarter) and 85% (six months), reaching record levels due to strong demand and lower commodity costs.
• Working Capital: Inventories increased $31.3 million from year-end 2008, primarily due to seasonal buildup in Winchester and higher caustic soda inventory. Accounts payable decreased $47.0 million, partly due to a $20.6 million settlement payment related to the prior sale of the Metals business.
• Capital Expenditures: Increased to $87.6 million for the six months ended June 30, 2009, up from $62.4 million in the prior year, driven by the St. Gabriel, LA facility conversion project.

Guidance, Outlook, and Risks

• Q3 2009 Outlook: Net income is projected at $0.20 per diluted share, down from $0.49 in Q3 2008. This forecast includes an anticipated $44 million pretax recovery of environmental costs.
  • Chlor Alkali: Expected to report a segment loss in Q3 due to precipitous declines in caustic soda prices and weak demand. ECU netbacks are expected to decline ~40% in Q3. Operating rates are projected at 70-75%.
  • Winchester: Results expected to be comparable to Q2 2009 and higher than Q3 2008, supported by continued high demand.
• Full Year 2009 Outlook:
  • Capital spending revised to $130-$135 million (down $5 million from prior forecast).
  • Environmental charges (excluding the $44M recovery) expected to be $20-$25 million.
  • Effective tax rate expected to be 35-36%.
• Regulatory Risk: Legislation introduced in Congress to ban mercury cell technology (used in ~18% of Olin's capacity) within two years of enactment. The impact is currently indeterminable.
• Environmental Contingencies: Total reserves for environmental liabilities stand at $165.7 million. Future charges remain material to operating results.

Investor Verification Checklist

• Mercury Cell Legislation: Monitor the progress of the U.S. House and Senate bills banning mercury cell technology and potential impact on 18% of Chlor Alkali capacity.
• Caustic Soda Pricing: Verify the trajectory of caustic soda prices, which have fallen precipitously, driving the projected Q3 Chlor Alkali segment loss.
• Environmental Recovery: Confirm the realization of the anticipated $44 million pretax environmental cost recovery in Q3 2009.
• Winchester Demand Sustainability: Assess whether the "above normal" demand for ammunition, driven by post-election trends, will persist into the second half of 2009.
• Capital Project Completion: Track the completion of the St. Gabriel, LA facility conversion to ensure capital spending aligns with the revised $130-$135 million full-year guidance.