OLN

OLIN Corp 10-Q Summary: Period Ended September 30, 2008

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 Metals business was sold in November 2007 and is reported as discontinued operations. The reporting period covers the three and nine months ended September 30, 2008.

Key Financial Metrics

Note: Net Income for the nine months ended Sep 30, 2007 was a loss of $24.5 million due to a $125.4 million loss on the disposal of the Metals business (discontinued operations).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 44% ($152.6M) for the quarter and 53% ($458.3M) for the nine months compared to the prior year. This was driven primarily by the acquisition of Pioneer Companies (added $110.3M in Q3 sales) and higher ECU (Ethylene Chlorine Unit) prices in the Chlor Alkali segment.
• Profitability: Operating income surged 130% for the quarter and 140% for the nine months. Gross margin improved to 24% of sales in Q3 2008 from 20% in Q3 2007.
• Unusual Item: The company recorded a $26.6 million impairment charge in Q3 2008 for corporate debt securities that became worthless due to financial market turmoil and the issuer's appointment of a receiver. This charge reduced Net Income but did not impact Operating Income.
• Segment Performance:
  • Chlor Alkali: Income increased 47% (Q3) and 42% (9mo) due to Pioneer synergies and pricing, despite hurricane-related outages reducing operating rates to 89% (Q3).
  • Winchester: Income was flat for the quarter ($9.8M) but up 24% for the nine months ($29.3M), driven by higher volumes to law enforcement and improved pricing.

Guidance, Outlook, and Risks

• Q4 2008 Guidance: Earnings from continuing operations are projected in the range of $0.65 per diluted share.
• Outlook:
  • Chlor Alkali: Earnings expected to improve vs. last year due to higher ECU netbacks, though operating rates are expected to decline to the low 80% range due to seasonal weakness and economic conditions. Caustic soda prices are expected to remain strong, while chlorine prices are expected to decline.
  • Winchester: Expected to be approximately breakeven in the seasonally weak fourth quarter.
• Environmental Risks: The company maintains a reserve of $161.1 million for environmental liabilities. Charges to income for investigatory and remedial activities were $21.2 million for the nine months ended Sep 30, 2008. Future charges remain material and uncertain.
• Pension Status: The defined benefit pension plan remains overfunded. The company froze the plan for salaried employees effective Jan 1, 2008, reducing future expense volatility.
• Liquidity: Cash flow from operations was negative ($0.5M) for the nine months due to increased working capital requirements (receivables and inventory) and higher tax payments, despite strong earnings. The company has $195.1 million available under its senior revolving credit facility.

Investor Verification Checklist

• Debt Security Impairment: Verify the status of the $26.6 million impaired investment and confirm no further losses are anticipated from the issuer.
• Environmental Reserves: Monitor the $161.1 million environmental reserve for potential increases due to new site discoveries or regulatory changes.
• Working Capital Trends: Assess the sustainability of the $154.8 million increase in working capital, particularly receivables and inventory levels.
• Chlor Alkali Pricing: Track the divergence between rising caustic soda prices and declining chlorine prices to validate the ECU netback outlook.
• Capital Expenditures: Confirm progress on the $75.8 million St. Gabriel, LA facility expansion and total 2008 capex guidance of $190M-$200M.