OLIN Corp. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for Olin Corporation for the period ended September 30, 2007. Olin operates two primary continuing business segments: Chlor Alkali Products (chlorine, caustic soda, bleach) and Winchester (sporting and military ammunition). The Metals segment has been classified as discontinued operations following an agreement to sell the business to Global Brass and Copper Holdings, Inc. for $400 million, expected to close in the fourth quarter of 2007. The company also acquired Pioneer Companies, Inc. on August 31, 2007, for $426.1 million, integrating it into the Chlor Alkali segment.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Sales (Continuing Ops) | $350.3 | $872.0 |
| Operating Income (Continuing Ops) | $37.8 | $77.4 |
| Income from Continuing Ops | $32.7 | $71.2 |
| Net (Loss) Income | $(83.2) | $(24.5) |
| Diluted EPS (Continuing Ops) | $0.44 | $0.96 |
| Diluted EPS (Net) | $(1.12) | $(0.33) |
| Cash and Equivalents | $42.1 | $42.1 (Balance Sheet) |
| Total Debt | $430.7 | $430.7 (Balance Sheet) |
| Operating Cash Flow (Continuing) | N/A | $8.7 |
Note: Net loss is driven by a $125.4 million loss on the disposal of discontinued operations (Metals segment).
Material Changes vs. Prior Period
- Revenue Growth: Sales from continuing operations increased 28% ($76.6 million) in the quarter and 10% ($79.4 million) for the nine months compared to 2006. This growth was primarily driven by the Pioneer acquisition ($46.1 million in Q3 sales) and higher volumes/prices in the Winchester segment.
- Profitability: Income from continuing operations decreased 35% in the quarter and 34% for the nine months compared to 2006. This decline is attributed to lower ECU (Equivalent Chlorine Unit) selling prices in the Chlor Alkali segment, increased environmental provisions ($16.2 million in Q3 vs. $6.2 million in 2006), and higher freight costs.
- Discontinued Operations: The Metals segment generated a net loss of $125.4 million in the quarter due to the impairment charge associated with the pending sale. Without this charge, the Metals segment was profitable.
- Liquidity: Cash and cash equivalents decreased from $199.8 million at year-end 2006 to $42.1 million at September 30, 2007, largely due to the $426.1 million cash outlay for the Pioneer acquisition and a $100 million voluntary pension contribution.
Guidance, Outlook, and Risks
- Q4 2007 Outlook: Management projects earnings from continuing operations in the range of $0.30 per diluted share. This reflects seasonal weakness and scheduled maintenance outages in the Chlor Alkali segment.
- Environmental Costs: Charges for environmental investigatory and remedial activities are expected to decline in Q4 from Q3 levels. Total annual charges are estimated in the $35 million range. A $7.8 million increase in Q3 was due to revised remediation estimates at a former waste disposal site.
- Pension Plan Freeze: In October 2007, Olin announced a freeze of its defined benefit pension plan for salaried and certain hourly employees effective January 1, 2008. This is expected to reduce pension expense by $8 million to $12 million in 2008.
- Acquisition Synergies: The company anticipates achieving an annual run rate of $20 million in synergies from the Pioneer acquisition by the end of Q2 2008, with a total target of $35 million.
- Risks: Key risks include volatility in commodity prices (lead, copper, chlorine), environmental remediation cost uncertainties, and the cyclical nature of the chlor-alkali industry. The company is also subject to litigation regarding the Pioneer acquisition (Denton v. McGovern) and environmental penalties at the St. Gabriel facility.
Investor Verification Checklist
- Metals Sale Closing: Verify the final closing date and working capital adjustments for the $400 million Metals segment sale to confirm the final loss on disposal.
- Pioneer Integration: Monitor the realization of the projected $35 million in annual synergies and the completion of the St. Gabriel facility conversion (mercury cell to membrane) to achieve $20-$25 million in cost savings.
- Environmental Liabilities: Track the $137.0 million in accrued environmental liabilities, particularly the $36.5 million assumed from Pioneer, for potential future adjustments.
- Debt Structure: Review the repayment of the $120 million Pioneer convertible debt (plus $26.3 million premium) expected in Q4 2007 and the impact on leverage ratios.
- Commodity Hedging: Assess the effectiveness of hedging strategies given the significant volatility in lead prices (up 164% in Q3) and energy costs.