OLN

OLIN Corp. 10-Q Summary: Period Ended September 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 nine months ended September 30, 2006. The company is a large accelerated filer incorporated in Virginia.

Key Financial Metrics

Margins: Gross margin for the nine months ended September 30, 2006, was 11% of sales, down from 15% in the prior year period. Operating margin for the nine months was approximately 5% ($120.5M / $2,403.4M).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 42% ($252.9M) in Q3 and 37% ($649.8M) for the nine months compared to 2005. This was driven primarily by the Metals segment, where sales rose 67% in Q3 due to a 108% increase in copper prices (COMEX average $3.54/lb vs $1.70/lb in 2005). Chlor Alkali sales also increased due to higher electrochemical unit (ECU) prices.
• Profitability: Net income increased 79% in Q3 and 22% for the nine months. However, operating income for the nine months decreased 17% ($25.6M) compared to 2005, largely due to higher pension and environmental costs and restructuring charges.
• Cash Flow: Net cash used in operating activities was $25.0 million for the nine months ended September 30, 2006, a significant reversal from the $169.8 million provided in the prior year. This was primarily due to an $80.0 million voluntary pension contribution (vs $6.0M in 2005) and a $77.0 million increase in cash tax payments, including a $44.0 million IRS settlement payment.
• Restructuring: The company recorded a $15.7 million pretax restructuring charge in Q1 2006 related to the closure of the Waterbury Rolling Mills facility. This was partially offset by a $13.5 million LIFO inventory liquidation gain.

Guidance, Outlook, and Risks

• Q4 2006 Outlook: Management expects earnings in the range of $0.25 per diluted share for the quarter ending December 31, 2006, reflecting normal seasonal weakness.
  • Chlor Alkali: Earnings expected to be similar to Q4 2005; ECU netbacks expected to decline but full-year 2006 netbacks to exceed 2005.
  • Metals: Earnings expected to decline vs. Q4 2005 due to lower volumes and higher metal costs. The company is considering the possible closure of the New Haven Copper facility.
  • Winchester: Earnings expected to be in the small loss to breakeven range.
• Full Year 2006 Outlook: Full-year pension expense is projected at approximately $39 million (vs $26.2M in 2005). The effective tax rate is expected to be approximately 36%.
• Key Risks and Contingencies:
  • Environmental: Reserves for environmental remediation total $98.7 million. Future charges could be material if site assessments change.
  • Pension Funding: The "Pension Protection Act of 2006" may require faster funding of defined benefit plans. Adoption of SFAS No. 158 in Q4 2006 is expected to result in a pretax charge to other comprehensive income of approximately $125 million.
  • Commodity Prices: Significant exposure to fluctuations in copper, zinc, and energy prices.

Investor Verification Checklist

• Verify the impact of the $44.0 million IRS tax settlement payment on future cash flow and tax reserves.
• Monitor the execution of the Metals restructuring, specifically the potential closure of the New Haven Copper facility and the realization of projected $9.0M-$10.0M annual savings.
• Assess the sustainability of the Metals segment's revenue growth given the 108% year-over-year increase in copper prices and potential demand slowdowns in automotive and building products.
• Review the $80.0 million pension contribution and the projected $39 million full-year pension expense to understand future cash outflow requirements under the Pension Protection Act.
• Confirm the status of the $98.7 million environmental reserve and any new site liabilities that may arise.