OLN

OLIN Corp. 10-Q Summary: Period Ended June 30, 2007

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, 2007. The company is a large accelerated filer incorporated in Virginia.

Key Financial Metrics

Margins: Gross margin for the six months ended June 30, 2007, was 10% of sales, down from 12% in the prior year period. The effective tax rate was 33.7% for the six months ended June 30, 2007.

Material Changes vs. Prior Period

• Revenue: Sales increased 3% year-over-year to $1,604.8 million. This was driven by a 5% increase in Metals sales (due to higher metal prices) and a 14% increase in Winchester sales (higher prices and volumes), partially offset by a 6% decline in Chlor Alkali sales due to lower ECU prices.
• Profitability: Net income decreased 12% to $58.7 million. Operating income declined 16% to $71.1 million, primarily due to lower selling prices in the Chlor Alkali segment and higher operating costs (electricity, freight).
• Unusual Items: The Metals segment reported LIFO inventory liquidation gains of $13.1 million for the six months ended June 30, 2007, compared to $13.5 million in the prior year. A restructuring credit of $1.7 million was recorded in 2007, contrasting with a $15.7 million charge in 2006.
• Cash Flow: Net cash provided by operating activities improved significantly to $7.6 million from a use of $80.8 million in the prior year. This improvement was largely due to a decrease in working capital requirements and a significant reduction in cash tax payments ($80.6 million decrease), despite a $100 million voluntary pension contribution.

Guidance, Outlook, and Risks

• Acquisition: Olin entered into a merger agreement to acquire Pioneer Companies, Inc. for approximately $420 million in cash. The deal is expected to close in the third quarter of 2007. Financing will utilize cash and new credit facilities ($250 million total).
• Q3 2007 Outlook: Earnings are projected at $0.40 per diluted share. This includes an estimated $6.0 million LIFO gain from Metals inventory reductions. The forecast excludes the impact of the Pioneer acquisition.
• Segment Outlook:
  • Chlor Alkali: Earnings expected to be similar to Q2, with higher ECU values offset by seasonally higher electricity and transport costs.
  • Metals: Results expected to decline from Q2 due to planned maintenance shutdowns. Management remains confident in achieving a 20% inventory reduction target by end of 2008.
  • Winchester: Earnings expected to improve due to the pre-hunting season. Price increases of up to 15% were announced for September 1, 2007, due to rising lead costs.
• Risks and Contingencies:
  • Environmental: Reserves for environmental remediation total $93.0 million. Annual cash outlays are estimated at $45 million to $55 million. Future charges may be material.
  • Legal: A stockholder derivative action was filed against Pioneer and Olin regarding the merger, seeking to enjoin the transaction. Management believes the allegations are without merit.
  • Pension: A $100 million voluntary contribution was made to the defined benefit plan in May 2007 to meet funding requirements.

Investor Verification Checklist

• Verify the closing status and regulatory approval of the Pioneer Companies acquisition.
• Monitor the impact of the $100 million pension contribution on future cash flows and funding requirements.
• Track the execution of the Metals inventory reduction program and the sustainability of LIFO gains.
• Assess the outcome of the stockholder derivative lawsuit challenging the Pioneer merger.
• Review the effectiveness of price increases in the Winchester segment to offset rising lead costs.
• Confirm the utilization of the new $250 million credit facilities and the $250 million accounts receivable securitization facility.