OMNOVA SOLUTIONS INC. Overview
OMNOVA Solutions Inc. became an independent, publicly-traded company onOctober 1, 1999 , when it was spun off byGenCorp Inc. , its former parent company.OMNOVA Solutions is incorporated under the laws of theState of Ohio , and its headquarters is located at25435 Harvard Road ,Beachwood, Ohio 44122-6201.OMNOVA Solutions is a global innovator of performance enhancing chemistries and surfaces for a variety of commercial, industrial and residential end uses. Our products provide a variety of important functional and aesthetic benefits to hundreds of products that people use daily. We hold leading positions in key market categories, which have been built through innovative products, customized product solutions, strong technical expertise, well-established distribution channels, recognized brands, and long-standing customer relationships. We have strategically located manufacturing, technical and other facilities globally to service our broad customer base. OMNOVA operates two business segments: Specialty Solutions and Performance Materials. Financial information relating to the Company's business segments is included in Note O to the Consolidated Financial Statements of this report. Specialty Solutions - The Specialty Solutions segment consists of three business lines: specialty coatings & ingredients, oil & gas, and laminates & films. The Specialty Solutions segment develops, designs, produces, and markets a broad line of specialty products for use in coatings, adhesives, sealants, elastomers, laminates, films, nonwovens, and oil & gas products. These products are used in numerous applications, including architectural and industrial coatings; nonwovens used in hygiene products, filtration and construction; drilling additives for oil and gas drilling, cementing and fracking; elastomeric modification of plastic casings and hoses used in household and industrial products and automobiles; tapes and adhesives; sports surfaces; textile finishes; commercial building refurbishment; new construction; residential cabinets; flooring; ceiling tile; furnishings; manufactured housing; health care patient and common area furniture; and a variety of industrial films applications. The segment's products improve the performance of customers' products, including stain, rust and aging resistance; surface modification; gloss; softness or hardness; dimensional stability; high heat and pressure tolerance; and binding and barrier (e.g. moisture, oil) properties. Specialty coatings & ingredients. OMNOVA specialty coatings & ingredients is a leading global supplier of polymers, waterborne and solvent borne dispersions, elastomers, and other specialty chemicals for a variety of product categories. Applications for our specialty polymers and chemicals include: specialty coatings; nonwovens (such as disposable hygiene products, engine filters, roofing mat, scrub pads); construction; adhesives; tape; floor care; textiles; graphic arts; home & personal care; and various other specialty applications. Our focus is on developing unique products for custom applications that address specific customer needs, including enhanced functionality, improved durability, high temperature, chemical and UV resistance, corrosion resistance, improved environmental performance, and improved processibility. Laminates & films. OMNOVA's laminates & films business line is a leading supplier of vinyl, paper, and specialty laminates, and performance films. Our laminates are used as alternatives to wood, paint, stone, stainless steel, high pressure laminates, and thermally fused laminates in markets where durability, design, and cost are key requirements. We offer our customers a broad range of designs and textures, as well as proprietary coating technology that provides enhanced durability and scratch and stain resistance. Applications for our laminates include: kitchen and bath cabinets; manufactured housing and recreational vehicle interiors; flooring; commercial and residential furniture; retail display fixtures; home furnishings; consumer appliances; bath and spa surrounds; food service tables; wall protection; and architectural accents. Films applications include: luxury vinyl tile (LVT); awnings; tents; flooring; promotional graphics; medical products; movie screens; decking; ceiling tile; and shower pan liners. Oil & gas. OMNOVA's oil & gas is a leading supplier of specialty wellbore chemicals used in demanding applications all over the world. We offer a wide range of solutions including fluid loss control and sealing, emulsifiers, lubricants, and rheological modifiers for drilling fluids. The business also offers flow control and properties enhancement in cementing operations, gel additives for hydraulic fracturing fluids, and strengthening agents. We design unique polymers that meet conventional and unconventional drilling and completion requirements. Performance Materials - The Performance Materials segment serves mature markets including plastics, paper, carpet and coated fabrics with a broad range of polymers based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, high styrene pigments, polyvinyl acetate, acrylic, styrene acrylic, calcium stearate, glyoxal, and bio-based chemistries. Performance Materials' custom-formulated products are tailored latexes, resins, binders, antioxidants, hollow plastic pigment, coated fabrics, and rubber reinforcing which are used in tire cord, polymer stabilization, industrial rubbers, carpet, paper, and various other applications. Its products provide a variety of functional properties to 21 -------------------------------------------------------------------------------- enhance the Company's customers' products, including greater strength, adhesion, dimensional stability, ultraviolet resistance, improved processibility, and enhanced appearance. Performance additives. OMNOVA is also a leading global supplier of vinyl pyridine latex, which is used in bonding fabric to rubber for tire and belting applications, and reinforcing resins which are used in other rubber goods. In addition, the Company is a leading global supplier of antioxidants used in polymer stabilization and synthetic latex gloves. Paper and carpet.OMNOVA Solutions is an innovative supplier of custom-formulated SB and SBA latex and hollow plastic pigments for carpet, paper and paperboard coatings. Applications for our products include paper and paperboard coatings used in specialty papers, food cartons, household and other consumer and industrial packaging, magazines, catalogs, direct mail advertising, and brochures. Our products for the carpet industry secure carpet fibers to the carpet backing and adhere the primary backing to the secondary backing, while meeting the stringent manufacturing, environmental, odor, flammability, and flexible installation requirements of our customers. Our strong historical position in residential carpeting has been enhanced by new products to serve that market, as well as innovations in commercial carpet backing binders that provide moisture barrier and other properties, enabling the replacement of higher cost polyurethane binders. Coated fabrics.OMNOVA Solutions is a leading North American and Asian supplier of vinyl and urethane coated fabrics for transportation, marine, commercial, residential, and health care applications. Our durable coated fabrics are well-suited for demanding, high-use environments and offer a cost effective alternative to other surfacing materials, such as leather and textile fabrics. Applications for our coated fabrics include: transportation seating (automotive OEM, bus and other mass transit, marine, and motorcycle); automotive aftermarket applications; contract and health care furniture; residential applications; stadium and arena seating; and healthcare equipment. A key differentiator for our coated fabrics products is our PreFixx® protective coating, long recognized for delivering the industry's best-in-class performance. The Company primarily sells its products directly to manufacturers, and has manufacturing facilities inthe United States ,France ,Portugal ,China , andThailand . For additional information about the Company's business (other than the description of the Company's reporting segments), please refer to Item 1 Business of the Company's 2019 Annual Report on Form 10-K. The Company has historically experienced stronger sales and income in its second, third, and fourth quarters, comprised of the three-month periods endingMay 31 ,August 31 , andNovember 30 . Performance in the first quarter (December through February) has historically been affected by generally lower levels of customer manufacturing, construction, and refurbishment activities during the holidays and cold weather months. The Company's chief operating decision maker ("CODM"), its Chief Executive Officer ("CEO"), makes decisions, assesses performance, and allocates resources prospectively by reporting segment. Segment information has been prepared in accordance with guidance promulgated by the FASB.The Company has two operating segments: "Specialty Solutions", a segment focused on the Company's higher growth specialty business, and "Performance Materials," a segment comprised of the Company's businesses which are focused on more mature markets. These reporting segments were determined based on the products and services provided. Accounting policies of the segments are the same as those described in Note A - Pending Merger, Basis of Presentation, Description of Business and Accounting Standards. For a reconciliation of the Company's segment operating performance information, please refer to Note O of the Company's Consolidated Financial Statements. Impacts of COVID-19 onOMNOVA's Business The Company did not observe significant impacts on its business or results of operations for the quarter endedFebruary 29, 2020 due to the global emergence of Coronavirus disease (COVID-19). However, the ultimate impacts of COVID-19 on our business are currently unknown. We will continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers and shareholders. We cannot predict the effects that such actions may have on our business or strategy, including the effects on our customers and prospects, or on our financial results, in particular with respect to demand for our products. Raw Materials A majority of the Company's raw materials are derived from petrochemicals and chemical feedstocks, where prices can be cyclical and volatile. Styrene and butadiene, key raw material components, are generally available worldwide, and OMNOVA has supply contracts with several producers. OMNOVA believes there is adequate global capacity to serve demand. At times, when the demand of butadiene exceeds supply, it is sold on an allocated basis.
Other key raw materials utilized by the Company include acrylites, polyvinyl chloride (PVC) resins, textiles, and plasticizers. These raw materials are generally available worldwide from several suppliers.
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The Company negotiates pricing with a majority of customers considering the
value-added performance attributes of those products and the cost of the raw
materials. The Company's pricing objective, which may or may not be met, is to
recover raw material prices increases for non-indexed contracts within three
months.
OMNOVA had indexed sales price contracts covering approximately 25% of its
sales. These contract indexes are generally comprised of several components: a
negotiated fixed amount per pound, and the market price of key raw materials
(i.e., styrene and butadiene). The indexed contracts provide that OMNOVA will
pass through the increases or decreases of key raw materials, generally within a
30 to 60 day period. Indexed contracts vary in length, generally from 12 to 36
months.
Key Indicators
Key economic measures relevant to the Company include global economic growth
rates, discretionary spending for durable goods, oil and gas consumption and
drilling levels, U.S. commercial real estate occupancy rates, U.S. office
furniture sales, manufactured housing shipments (including recreational
vehicles), housing starts and sales of existing homes, and forecasts of raw
material pricing for certain petrochemical feed stocks. Key Original Equipment
Manufacturer ("OEM") industries, which provide a general indication of demand
drivers to the Company, include commercial and residential construction and
refurbishment, automotive and tire production, furniture, flooring, and ABS
manufacturing. These measures provide general information on trends relevant to
the demand for the Company's products, but the trend information does not
necessarily directly correlate with demand levels in the markets which
ultimately use the Company's products in part because the Company's market share
is relatively small in a number of specialty markets.
Key operating measures utilized by the business segments include: orders; sales
and pricing; working capital days; inventory; productivity; plant utilization;
new product vitality; cost of quality; order fill-rates, which provide key
indicators of business trends; and safety and other internal metrics. These
measures are reported on various cycles including daily, weekly and monthly,
depending on the needs established by operating management.
Key financial measures utilized by Management to evaluate the results of its
businesses and to understand the key variables impacting the current and future
results of the Company include sales and pricing; gross profit; SG&A; adjusted
operating profit (loss); adjusted net income (loss); consolidated earnings
(loss) before interest, taxes, depreciation, and amortization ("EBITDA") as set
forth in the Net Leverage Ratio in the Company's $350,000,000 Term Loan B
agreement; Adjusted EBITDA, working capital; operating cash flows; capital
expenditures; cash interest expense; adjusted earnings per share; and applicable
ratios, such as inventory turnover; working capital turnover; return on sales
and assets; and leverage ratios. These measures, as well as objectives
established by the Company's Board of Directors, are reviewed at monthly,
quarterly, and annual intervals and compared with historical periods.
Results of Operations for the Three months ended February 29, 2020 Compared to
the Three months ended February 28, 2019
The Company's net sales in the first quarter of 2020 were $155.6 million , a
decrease of $13.3 million , or 7.9%, compared to $168.9 million in the first
quarter of 2019. The Specialty Solutions business segment revenue in 2020 was
flat with 2019, and the Performance Materials business revenue decreased by
$13.4 million , or 23.8%. The overall decrease was due to lower volume, primarily
in paper and carpet, and the negative impact of foreign currency, partially
offset by favorable pricing and mix.
Gross profit in the first quarter of 2020 was $35.2 million with a gross profit
margin of 22.6%, compared to gross profit of $36.9 million and a gross profit
margin of 21.8% in the first quarter of 2019. The increase in gross profit
margin was primarily due to improved product mix and lower raw material costs.
SG&A in the first quarter of 2020 was $26.8 million , compared to $28.7 million
in the first quarter of 2019. The decrease was primarily due to lower employee
incentive compensation costs and an overall focus on controlling SG&A expense.
Interest expense in the first quarter of 2020 was $4.6 million , compared to $5.0
million in the first quarter of 2019. The decrease of $0.4 million , or 8.0%, was
primarily due to lower interest rates on outstanding debt.
The Company recorded income tax benefits of $0.9 million and $0.8 million for
the three months ended February 29, 2020 and February 28, 2019 , respectively.
The Company's effective tax rate for the first quarters of both 2020 and 2019
were different than the U.S. federal statutory tax rate primarily due to losses
in jurisdictions in which no tax benefit was recognized.
Net loss for the first quarter of 2020 was $3.9 million , or $0.09 per diluted
share, compared to a net loss of $4.6 million , or $0.10 per diluted share,
during the same quarter in the prior year.
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--------------------------------------------------------------------------------Segment Discussion
The following Segment Discussion presents information used by the Company in assessing the results of operations by business segment. The Company believes that this presentation is useful for providing the investor with an understanding of the Company's business and operating performance because these measures are used by the CODM in making decisions, assessing performance and allocating resources.
The following table reconciles segment sales to consolidated net sales and segment operating profit to consolidated income (loss) before income taxes:
Three Months Ended
February
29, 2020
(Dollars in millions)
Net Sales :
Specialty Solutions $ 112.8 $ 112.7
Performance Materials 42.8 56.2
Consolidated Net Sales $ 155.6 $ 168.9
Segment Operating Profit:
Specialty Solutions $ 11.4 $ 9.3
Performance Materials (4.7) (2.8)
Total Segment Operating Profit 6.7 6.5
Interest expense (4.6) (5.0)
Corporate expense (6.9) (6.9)
Consolidated Income (Loss) Before Income Taxes $ (4.8) $ (5.4)
Specialty Solutions
Specialty Solutions' net sales were approximately flat at $112.8 million in the
first quarter of 2020, compared to $112.7 million in the first quarter of 2019.
Higher volumes in oil and gas, decorative laminates, and performance films and
favorable mix in decorative laminates and performance films were partially
offset by lower volumes in coatings, home and personal care, and nonwovens.
Segment operating profit was $11.4 million for the first quarter of 2020
compared to $9.3 million for the first quarter of 2019. The increase of $2.1
million , or 22.6%, from the first quarter of 2019 was due to favorable mix,
primarily in decorative laminates, and favorable raw material costs, primarily
in nonwovens, coatings, and oil and gas. Segment operating profit includes items
that Management excludes when evaluating the results of the Company's segments.
Those items for the first quarter of 2020 included $0.3 million for acquisition
and integration expenses and $0.2 million for a customs duty penalty. Those
items for the first quarter of 2019 were $0.1 million of acquisition and
integration related expenses.
Performance Materials
Performance Materials net sales decreased $13.4 million , or 23.8%, to $42.8
million during the first quarter of 2020, compared to $56.2 million during the
first quarter of 2019. The decrease was primarily driven by unfavorable volume
of $12.4 million , unfavorable price/mix of $0.6 million , and unfavorable foreign
currency exchange of $0.2 million compared to the same quarter last year.
Volumes were down in carpet, paper, antioxidants, and tire cord, which were
partially offset by increases in coated fabrics and reinforcing, when compared
to the same quarter last year.
Segment operating loss was $4.7 million for the first quarter of 2020 compared
to an operating loss of $2.8 million in the first quarter of 2019. Segment
operating loss includes items that Management excludes when evaluating the
results of the Company's segments. Those items for the first quarter of 2020
primarily consisted of $0.3 million of a customs duty penalty and $0.2 million
of asset impairment, facility and other closure costs. Those items for 2019
included $0.4 million of facility closure costs, $0.6 million of accelerated
depreciation, and $0.7 million of restructuring and severance costs.
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Corporate expenses were
Financial Resources
Three Months Ended
February 29, 2020 February 28, 2019 Change
(Dollars in millions)
Net cash provided by (used in) operating
activities $ (7.3) $ (8.3) $ 1.0
Net cash provided by (used in) investing
activities $ (4.0) $ (10.2) $ 6.2
Net cash provided by (used in) financing
activities $ 1.6 $ (2.3) $ 3.9
Net increase (decrease) in cash and cash
equivalents $ (10.0) $ (20.0) $ 10.0 Cash used in operating activities was
Cash used in investing activities was$4.0 million during the first three months of 2020 compared to$10.2 million in the first three months of 2019. Cash use in both 2020 and 2019 was primarily for ongoing capital expenditures. The Company incurred higher capital expenditures in the first quarter of 2019 to facilitate the transfer of styrene butadiene manufacturing from itsGreen Bay, Wisconsin plant to itsMogadore, Ohio plant. In addition, 2019 included a working capital settlement payment for the OMNOVA Portugal acquisition of approximately$2.8 million . The Company expects approximately$35.0 million of capital expenditures during 2020. Generally, capital expenditures are planned for asset replacement, new production capability, cost reduction, safety and productivity improvements and environmental protection. The Company expects to fund remaining capital expenditures with cash flow generated from operations. Cash provided by financing activities was$1.6 million during the first three months of 2020 compared to cash used in financing activities of$2.3 million during the first three months of 2019, primarily as a result of additional borrowings on its Senior Secured Revolving Facility. The Company's cash balance of$40.9 million as ofFebruary 29, 2020 consists of$3.5 million in theU.S. ,$26.9 million inAsia , and$10.5 million inEurope . The Company is not aware of any restrictions regarding the repatriation of its non-U.S. cash, however, repatriation of cash from certain countries may have certain tax consequences and may not be able to be completed in a timely manner.
The Company believes that its cash flows from operations, together with existing credit facilities and cash on hand will be adequate to fund its cash requirements for at least the next twelve months.
Treasury Stock Purchases OnSeptember 25, 2018 , the Company's Board of Directors authorized the repurchase of up to$20.0 million of the Company's common shares, which authorization expires upon the completion of the$20.0 million in repurchases. The Company may use various methods to make the repurchases, including open market repurchases, negotiated block transactions, or open market solicitations for shares. Because the Company has not adopted a Rule 10b5-1 plan for these repurchases, repurchases may only be made during open window periods depending upon relevant factors including market or business conditions. Repurchases may be discontinued at any time. The Company did not repurchase any shares during the first quarter of 2020 under the approved plan. Pursuant to the Company's Merger Agreement with Synthomer, the Company is prohibited from executing share repurchases under the plan. Shares acquired during 2020 or 2019 resulted from common shares deemed surrendered by employees in connection with the Company's equity compensation and benefit plans to satisfy employee income tax obligations upon vesting.
Debt
Information regarding the Company's debt is disclosed in the Debt and Credit Lines footnote to the Company's Unaudited Interim Consolidated Financial Statements.
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Non-GAAP Financial Measures for Periods Ended
The following discussion includes Non-GAAP financial measures. An explanation of Managements' reasons for reviewing and presenting these Non-GAAP measures, and a reconciliation of the Non-GAAP financial measures to GAAP is provided below under the heading "GAAP to Non-GAAP Reconciliations." Consolidated Results For the first quarter of 2020, segment operating loss was$0.2 million compared to$0.4 million last year. Segment operating loss for the first quarter of 2020 included$2.2 million of items primarily related to asset impairment costs, facility closures, acquisition and integration related expenses, and a customs duty penalty. Segment operating loss for the first quarter of 2019 included$2.0 million of items primarily related to restructuring and severance costs, accelerated depreciation on production transfer, acquisition and integration related expense, and asset impairment charges and facility closure costs. Adjusted Segment Operating Loss, which excludes those items, was$2.6 million for the first quarter of 2020 compared to$3.4 million for the first quarter of 2019, with Specialty Solutions Adjusted Segment Operating Profit up 26.6% to$11.9 million , offset by a decline in Performance Materials Adjusted Segment Operating Profit (See Tables A and B). Adjusted Diluted Loss per Share, which also excludes those items, was$0.04 for the first quarter of 2020, compared to$0.06 last year. The improvement was driven by strength broadly across the Specialty Solutions businesses partially offset by ongoing challenges in certain Performance Materials businesses. Trailing Twelve Month Adjusted Segment EBITDA was$70.6 million compared to$77.9 million last year. While Trailing Twelve Month Adjusted Segment EBITDA was relatively flat for Specialty Solutions, at$88.1 million compared to$87.1 million , the Trailing Twelve Month Adjusted Segment EBITDA for Performance Materials declined$13.0 million , from$14.5 million at the end ofFebruary 2019 to$1.5 million at the end ofFebruary 2020 . (See Tables C and D.) Specialty Solutions Segment Results For the first quarter of 2020, Specialty Solutions operating profit was$11.4 million , compared with$9.3 million last year. Adjusted Segment Operating Profit for Specialty Solutions was$11.9 million , or 10.5% of net sales, compared to$9.4 million , or 8.3% of net sales, last year. (See Tables A and B.) The Company's laminates & films business was the primary driver of growth over 2019, as its markets stabilized following a weak fiscal 2019 performance. The oil & gas business and the elastic modifier business were also favorable compared to 2019. Year-to-date, the Company's vitality index (sales from new products introduced over the last five years as a percentage of total sales) for Specialty Solutions was 23.0%, up from 19.4% last year. Performance Materials Segment Results Performance Materials' segment operating loss for the quarter was$4.7 million , compared with a loss of$2.8 million last year. Adjusted Segment Operating Loss for Performance Materials was$4.2 million , compared to a loss of$1.1 million last year. (See Tables A and B.) The primary drivers of the year-over-year decline include the Company's exit from the commodity paper market, volume reductions in the commodity carpet market, and increased competitive intensity in tire cord markets. The challenges in commodity-based markets like tire cord continue to mask the performance of the Company's smaller but more profitable Performance Material's businesses, including the coated fabrics, reinforcing resins, and antioxidants businesses. The segment is continuing to execute its strategy of growing the profitable business while reducing exposure to the least profitable businesses through repurposing assets and reducing sales and investments in the most commoditized end markets.
GAAP to Non-GAAP Reconciliations
Adjusted Segment Operating Profit, Adjusted Income, Adjusted Diluted Earnings Per Share, and Adjusted EBITDA are non-GAAP financial measures as defined by theSecurities and Exchange Commission . Management reviews adjusted financial measures in assessing the performance of the business segments and in making decisions regarding the allocation of resources to the business segments. Management believes that the adjusted information is useful for providing investors with an understanding of the Company's business and operating performance. Management excludes the items shown in the tables below because Management does not consider them to be reflective of normal operations. These adjusted financial measurements are not measurements of financial performance under GAAP and such financial measures should not be considered as an alternative to Segment Operating Profit, Net Income, Diluted Earnings Per Share or other measures of financial performance determined in accordance with GAAP. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. The tables below provide the reconciliation of these financial measures to the comparable GAAP financial measures. 26 --------------------------------------------------------------------------------
Non-GAAP and other Financial Matters
Three Months Ended February 29, 2020
Table A
Specialty Performance Combined
(In millions except per share data) Solutions Materials Segments Corporate Consolidated
Net Sales $ 112.8 $
42.8
Segment Operating Profit / Corporate Expense$ 11.4 $
(4.7)
- - - (4.6) (4.6)
Income (Loss) Before Income Taxes $ 11.4 11400000 $
(4.7)
Asset impairment, facility closure
costs and other 0.3 0.2 0.5 0.4 0.9
Customs duty penalty 0.2 0.3 0.5 - 0.5
Acquisition and integration related
expense - - - 0.8 0.8
Subtotal for management
excluded Items 0.5 0.5 1.0 1.2 2.2
Adjusted Segment Operating Profit /
Corporate Expense Before Income Taxes $ 11.9 $
(4.2)
0.7
Adjusted Income (Loss) $ (1.9)
Adjusted Diluted Earnings (Loss) Per Share from Adjusted Income $ (0.04)
*Income Tax rate is based on the Company's estimated normalized annual effective tax rate
Adjusted Segment Operating Profit as a % of Sales 10.5 % (9.8) % 4.9 % Segment /Corporate Capital Expenditures$ 3.0 $ 0.8 $ 3.8 $ 0.2 $ 4.0 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 11.9 $
(4.2)
- - - 4.6 4.6
Depreciation and amortization 4.7 2.6 7.3 0.4 7.7
Segment / Consolidated Adjusted
EBITDA $ 16.6 $
(1.6)
Adjusted EBITDA as a % of sales 14.7 % (3.7) % 9.6 % 6.2 %
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Non-GAAP and other Financial Matters (Continued)
Three Months Ended February 28, 2019
Table B
Specialty Performance Combined
(In millions except per share data) Solutions Materials
Segments Corporate Consolidated
$ 112.7 $ 56.2
Segment Operating Profit / Corporate Expense$ 9.3 $ (2.8)
- - - (5.0) (5.0)
Income (Loss) Before Income Taxes
$ 6.5 $ (11.9) $ (5.4) Management Excluded Items Restructuring and severance - 0.7 0.7 - 0.7 Accelerated depreciation on production transfer - 0.6 0.6 - 0.6 Acquisition and integration related expense 0.1 - 0.1 0.2 0.3 Asset impairment, facility closure costs and other - 0.4 0.4 - 0.4 Subtotal for management excluded Items 0.1 1.7 1.8 0.2 2.0 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 9.4 $ (1.1)
0.8
Adjusted Income (Loss) $ (2.6)
AAdjusted Diluted Earnings (Loss) Per Share from Adjusted Income $ (0.06) *Income Tax rate is based on the Company's estimated normalized annual effective tax rate
Adjusted Segment Operating Profit as a % of Sales 8.3 % (2.0) % 4.9 % Segment /Corporate Capital Expenditures$ 5.0 $ 2.0 $ 7.0 $ .4 $ 7.4 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 9.4 $ (1.1)
- - - 5.0 5.0
Segment / Consolidated Adjusted EBIT 9.4 (1.1) 8.3 (6.7) 1.6
Depreciation and amortization 4.9 2.4 7.3 .1 7.4
Segment / Consolidated Adjusted
EBITDA $ 14.3 $ 1.3 $ 15.6 $ (6.6) $ 9.0
Adjusted EBITDA as a % of sales 12.7 % 2.3 % 9.2 % 5.3 %
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Non-GAAP and other Financial Matters (Continued)
Trailing Twelve Months Ended February 29, 2020
Table C
Specialty Performance Combined
(In millions except per share data) Solutions Materials Segments Corporate Consolidated
Net Sales $ 513.1 $ 209.8 $ 722.9 $ - $ 722.9
Segment Operating Profit / Corporate
Expense $ 68.3 $ (17.7) $ 50.6 $ (49.3) $ 1.3
Interest expense - - - (19.6) (19.6)
Income (Loss) Before Income Taxes $ 68.3 $ (17.7) $ 50.6 $ (68.9) $ (18.3)
Management Excluded Items
Restructuring and severance 0.4 1.5 1.9 0.3 2.2
Accelerated depreciation on
production transfer - 0.4 0.4 - 0.4
Operational Improvements costs - - - 0.3 0.3
Asset impairment, facility closure
costs and other 0.1 10.5 10.6 0.7 11.3
Customs duty penalty 0.2 0.3 0.5 - 0.5
(Gain)/ loss on asset sales - (4.4) (4.4) 0.2 (4.2)
Deferred financing fees written-off - - - 0.2 0.2
Merger transaction costs - - - 9.4 9.4
Other financing (0.4) - (0.4) - (0.4)
Realized foreign currency translation
losses - - - 17.9 17.9
Acquisition and integration related
expense 0.4 0.4 0.8 0.3 1.1
Subtotal for management
excluded items 0.7 0.7 8.7 9.4 29.3 38.7
Adjusted Segment Operating Profit /
Corporate Expense Before Income Taxes $ 69.0 $ (9.0) $ 60.0 $ (39.6) $ 20.4
Income tax expense 5.1
Adjusted Income (Loss) $ 25.5
Adjusted Diluted Earnings (Loss) Per Share From Adjusted Income Adjusted Segment Operating Profit as a % of Sales 13.4 % (4.3) % 8.2 % Segment /Corporate Capital Expenditures$ 21.2 $ 7.0 $ 28.2 $ 1.6 $ 29.8 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 69.0 $ (9.0) $ 60.0 $ (39.6) $ 20.4 Unallocated corporate interest - - - 19.6 19.6 Depreciation and amortization 19.4 10.5 29.9 0.7 30.6
Segment / Consolidated Adjusted
EBITDA $ 88.4 88400000 $ 1.5 $ 89.9 $ (19.3) $ 70.6
Adjusted EBITDA as a % of sales 17.2 % .7 % 12.5 % 9.8 %
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Non-GAAP and other Financial Matters (Continued)
Trailing Twelve Months Ended February 28, 2019
Table D
Specialty Performance Combined
(In millions except per share data) Solutions Materials
Segments Corporate Consolidated
$ 491.2 $ 268.8
Segment Operating Profit / Corporate Expense$ 66.3 $ (14.7)
- - - (19.2) $ (19.2)
Income (Loss) Before Income Taxes $ 66.3 $ (14.7) 51.6 $ (44.7) $ 6.9
Management Excluded Items
Restructuring and severance - 1.8 1.8 .3 2.1
Accelerated depreciation on
production transfer .1 1.7 1.8 - 1.8
Asset impairment, facility closure
costs and other 1.1 14.9 16.0 .1 16.1
Environmental costs - (.1) (.1) - (.1)
Gain on sale of assets - - - (.9) (.9)
Acquisition and integration related
expense 1.3 .2 1.5 2.1 3.6
Subtotal for management
excluded items 2.5 18.5 21.0 1.6 22.6
Adjusted Segment Operating Profit /
Corporate Expense before Income Taxes $ 68.8 $ 3.8 72.6 $ (43.1) $ 29.5
Income tax expense (7.4)
Adjusted Income (Loss) $ 22.1
Adjusted Diluted Earnings (Loss) Per Share from Adjusted Income $ 0.49
Adjusted Segment Operating Profit as
a % of Sales 14.0 % 1.4 % 9.6 %
Segment / Corporate Capital
Expenditures $ 19.4 $ 7.3 $ 26.7 $ 1.3 $ 28.0
Adjusted Segment Operating Profit /
Corporate Expense Before Income Taxes $ 68.8 $ 3.8
- - - 19.2 19.2
Segment / Consolidated Adjusted EBIT 68.8 3.8 72.6 (23.9) 48.7
Depreciation and amortization 18.3 10.7 29.0 0.2 29.2
Segment / Consolidated Adjusted
EBITDA $ 87.1 $ 14.5 $ 101.6 $ (23.7) $ 77.9
Adjusted EBITDA as a % of sales 17.7 % 5.4 % 13.4 % 10.3 %
Significant Accounting Policies and Management Judgments
The Company's discussion and analysis of its results of operations, financial
condition, and liquidity are based upon the Company's consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the amounts of assets
and liabilities, revenues, and expenses and disclosure of contingent assets and
liabilities as of the date of the financial statements. The Company periodically
reviews its estimates and judgments including those related to product returns,
accounts receivable, inventories, litigation and environmental reserves,
pensions, and income taxes. The Company bases its estimates and judgments on
historical experience and on various assumptions that it believes to be
reasonable under the circumstances. Actual results may differ materially from
these estimates and judgments under different assumptions.
Information with respect to the Company's significant accounting policies and
management judgments which the Company believes could have the most significant
effect on the Company's reported results and require subjective or complex
judgments by management is contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Annual Report on
Form 10-K for the year ended November 30, 2019 , as filed with the SEC . The
Company has not made any changes in estimates or judgments that have had a
significant effect on the reported amounts.
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Environmental Matters
The Company's policy is to conduct its businesses with due regard for the
preservation and protection of the environment. The Company devotes significant
resources and management attention to comply with environmental laws and
regulations. The Company's Consolidated Balance Sheet as of February 29, 2020
reflects reserves for environmental remediation of $1.4 million . The Company's
estimates are subject to change and actual results may materially differ from
the Company's estimates. Management believes, on the basis of presently
available information, that resolution of known environmental matters will not
materially affect liquidity, capital resources, or the consolidated financial
condition of the Company.
Employee Matters
As of February 29, 2020 , the Company employed approximately 1,850 employees
globally. Approximately 12% of the Company's U.S. employees are covered by
collective bargaining agreements in the United States of which approximately 20
employees are covered by agreements that will expire within the next 12 months.
In addition, certain of our foreign employees are also covered by collective
bargaining agreements.
New Accounting Pronouncements
New accounting pronouncements impacting the Company are disclosed in Note A to
the Company's Unaudited Consolidated Financial Statements.
Shareholder Communications Pending the Merger
Pending its merger with Synthomer, the Company has suspended the distribution of
earnings releases and has discontinued earnings teleconferences, and the
Company's shareholders should not rely on the Company issuing any future
forward-looking guidance or on any existing forward-looking guidance. The
completion of the Merger is expected to occur on April 1, 2020 .
Forward-Looking Statements
This quarterly report on Form 10-Q includes descriptions of our current
business, operations, assets and other matters affecting the Company as well as
"forward-looking statements" as defined by federal securities laws. All
forward-looking statements by the Company, including verbal statements, are
intended to qualify for the protections afforded forward-looking statements
under the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectation, judgment, belief,
assumption, estimate or forecast about future events, circumstances or results
and may address business conditions and prospects, strategy, capital structure,
debt and cash levels, sales, profits, earnings, markets, products, technology,
operations, customers, raw materials, claims and litigation, financial
condition, and accounting policies among other matters. Words such as, but not
limited to, "will," "may," "should," "projects," "forecasts," "seeks,"
"believes," "expects," "anticipates," "estimates," "intends," "plans,"
"targets," "optimistic," "likely," "would," "could," "committed," and similar
expressions or phrases identify forward-looking statements.
All descriptions of our business, operations and assets, as well as all
forward-looking statements, involve risks and uncertainties. Many risks and
uncertainties are inherent in business generally and the markets in which the
Company operates or proposes to operate. Other risks and uncertainties are more
specific to the Company's businesses including businesses the Company acquires.
There also may be risks and uncertainties not currently known to us. The
occurrence of any such risks and uncertainties and the impact of such
occurrences is often not predictable or within the Company's control. Such
impacts could adversely affect the Company's business, operations or assets as
well as the Company's results and the value of your investment in OMNOVA and, in
some cases, such effect could be material. Certain risks and uncertainties
facing the Company are described below or elsewhere in this Form 10-Q.
All written and verbal descriptions of our business, operations and assets and
all forward-looking statements attributable to the Company or any person acting
on the Company's behalf are expressly qualified in their entirety by the risks,
uncertainties, and cautionary statements contained and referenced herein.
All such descriptions and any forward-looking statement speak only as of the
date on which such description or statement is made, and the Company undertakes
no obligation, and specifically declines any obligation, other than that imposed
by law, to publicly update or revise any such description or forward-looking
statements whether as a result of new information, future events or otherwise.
Risks and uncertainties that may adversely affect our business, operations,
assets, or other matters affecting the Company and may cause actual results and
the value of your investment in OMNOVA to materially differ from expectations
include, but are not limited to: (1) the Company's exposure to general economic,
business, and industry conditions; (2) changes in raw
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material prices and availability; (3) extraordinary events such as natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war; (4) the risk of doing business in foreign countries and markets; (5) the highly competitive markets the Company serves and continued consolidations among its competitors and customer base; (6) extensive and increasing governmental regulation, including environmental, health and safety regulations; (7) the Company's inability to protect its intellectual property or successfully defend itself from intellectual property claims; (8) claims and litigation; (9) changes in accounting policies, standards, and interpretations; (10) the actions of activist shareholders; (11) risks inherent in the operation of manufacturing facilities; (12) the Company's inability to achieve or achieve in a timely manner the objectives and benefits of cost reduction initiatives; (13) the Company's ability to develop and commercialize new products that can be value priced; (14) the Company's ability to identify and complete strategic transactions; (15) the Company's ability to successfully integrate acquired companies; (16) information system failures and breaches in security; (17) the Company's use of purchase orders rather than long-term contracts for most of its business; (18) the disproportionate impact of certain product lines on the Company's operating profitability; (19) customer credit risk; (20) continued increases in healthcare costs; (21) the Company's ability retain or attract key employees; (22) the Company's ability to renew collective bargaining agreements with employees on acceptable terms and the risk of work stoppages; (23) the Company's contribution obligations under itsU.S. pension plan; (24) the Company's reliance on foreign financial institutions to hold some of its funds; (25) the effect of goodwill impairment charges; (26) the volatility in the market price of the Company's common shares; (27) the Company's substantial debt position; (28) a decision to incur additional debt; (29) the operational and financial restrictions contained in the Company's debt agreements; (30) the effects of a default under the Company's term loan or revolving credit facility; (31) the Company's ability to generate sufficient cash to service its outstanding debt; and (32) potential changes in the LIBOR calculation method and the expected phase-out of LIBOR. In relation to the proposed acquisition of the Company by Synthomer, the following uncertainties and other factors could cause actual outcomes to differ from those set forth in the forward-looking statements: (i) business and operational impacts due to the announcement of the proposed merger; (ii) the risk that the contemplated transactions may not be consummated in a timely manner, if at all; and (iii) the expected delisting and deregistration of OMNOVA shares following completion of the Merger. Further risks that could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements are set forth under "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedNovember 30, 2019 , and its subsequent quarterly reports on Form 10-Q. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, although its situation and circumstances may change in the future. We provide greater detail regarding these risks and uncertainties in our 2019 Form 10-K and subsequent filings, which are available online at www.omnova.com and www.sec.gov.
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