<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1999 Commission File Number 1-15147
----------------- -------
OMNOVA Solutions Inc.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1897652
- ------------------------ -------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
175 Ghent Road Fairlawn, Ohio 44333-3300
----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES NO X
---- ----
At October 1, 1999, there were 41,797,551 outstanding shares of OMNOVA
Solutions' Common Stock, par value $0.10.
-1-
<PAGE> 2
OMNOVA SOLUTIONS INC.
Table of Contents
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Combined Statements of Income -
Three Months and Nine Months Ended August 31, 1999
and 1998 -3-
Combined Balance Sheets -
August 31, 1999 and November 30, 1998 -4-
Combined Statements of Cash Flows -
Nine Months Ended August 31, 1999 and 1998 -5-
Notes to the Unaudited Combined
Financial Statements as of August 31, 1999 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -15-
Item 3. Quantitative and Qualitative Disclosures About Market
Risk -20-
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K -21-
Signatures -22-
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
OMNOVA SOLUTIONS INC.
COMBINED STATEMENTS OF INCOME
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
NET SALES $203 $161 $570 $448
COSTS AND EXPENSES
Cost of products sold 131 106 368 296
Selling, general and administrative 40 28 117 84
Depreciation 8 4 20 13
Interest expense 5 2 15 5
Other (income) expense, net 2 1 4 --
Unusual items -- -- -- 8
---- ---- ---- ----
186 141 524 406
---- ---- ---- ----
INCOME BEFORE INCOME TAXES 17 20 46 42
Income tax provision 7 8 18 17
---- ---- ---- ----
NET INCOME $ 10 $ 12 $ 28 $ 25
==== ==== ==== ====
</TABLE>
See notes to combined financial statements.
-3-
<PAGE> 4
OMNOVA SOLUTIONS INC.
COMBINED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
ASSETS: ------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6 $ 4
Accounts receivable, net 113 102
Inventories 63 57
Deferred income taxes 10 9
Prepaid expenses and other 4 2
---- ----
TOTAL CURRENT ASSETS 196 174
Property, plant and equipment, net 198 193
Goodwill, net 157 155
Patents and other intangible assets, net 80 76
Other assets 8 5
---- ----
TOTAL ASSETS $639 $603
==== ====
LIABILITIES AND DIVISIONAL EQUITY:
CURRENT LIABILITIES
Notes payable $ 6 $ --
Accounts payable 54 73
Accrued payroll and personal property taxes 10 12
Other current liabilities 25 4
---- ----
TOTAL CURRENT LIABILITIES 95 89
Long-term debt -- --
Deferred income taxes 14 16
Other liabilities 11 9
---- ----
TOTAL LIABILITIES 120 114
DIVISIONAL EQUITY 519 489
---- ----
TOTAL LIABILITIES AND DIVISIONAL EQUITY $639 $603
==== ====
</TABLE>
See notes to combined financial statements.
-4-
<PAGE> 5
OMNOVA SOLUTIONS INC.
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
August 31, August 31,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28 $ 25
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for unusual items - 8
Depreciation 20 13
Amortization 6 2
Deferred income taxes (3) -
Changes in operating assets and liabilities net of effects of acquisitions and
dispositions of businesses:
Current assets (18) (8)
Current liabilities (9) (6)
Other non-current assets 1 1
Other non-current liabilities 2 1
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 27 36
----- -----
INVESTING ACTIVITIES
Capital expenditures (23) (12)
Proceeds from business and asset dispositions 9 -
Business acquisitions (11) (186)
Investment in joint venture (2) -
----- -----
NET CASH USED IN INVESTING ACTIVITIES (27) (198)
----- -----
FINANCING ACTIVITIES
Net transactions with GenCorp 2 164
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 2 164
----- -----
NET INCREASE IN CASH AND EQUIVALENTS 2 2
Cash and equivalents at beginning of year 4 -
----- -----
Cash and equivalents at end of period $ 6 $ 2
===== =====
</TABLE>
See notes to combined financial statements.
-5-
<PAGE> 6
OMNOVA SOLUTIONS INC.
NOTES TO THE UNAUDITED COMBINED
FINANCIAL STATEMENTS AS OF AUGUST 31, 1999
Note A - Basis of Presentation
- ------------------------------
OMNOVA Solutions Inc. (OMNOVA Solutions) develops, manufactures and markets
emulsion polymers, specialty chemicals and decorative and building products for
a variety of industrial, commercial and consumer markets. Prior to September 30,
1999, the OMNOVA Solutions' businesses were operated as divisions of GenCorp
Inc. (GenCorp). On September 30, 1999, GenCorp transferred to OMNOVA Solutions
some corporate assets and the assets related to these businesses and OMNOVA
Solutions assumed liabilities related to the assets and businesses transferred
and issued additional shares of common stock to GenCorp. On October 1, 1999,
GenCorp distributed as a dividend to its shareholders one share of OMNOVA
Solutions' common stock for each share of GenCorp common stock held of record as
of September 27, 1999 (the Spin-off). As a result of the Spin-off, OMNOVA
Solutions became an independent publicly held company and its operations ceased
to be owned by GenCorp. GenCorp and OMNOVA Solutions have entered into a number
of agreements with respect to the separation of the companies and to provide
mechanisms for an orderly transition following the Spin-off. Descriptions of the
various agreements are contained in OMNOVA Solutions' Registration Statement on
Form 10 under the Securities Act of 1934, filed with the Securities and Exchange
Commission on July 9, 1999, as amended on July 22, 1999, August 23, 1999 and
September 15, 1999 (the Registration Statement). The Registration Statement was
declared effective on September 21, 1999.
Financial data included in the accompanying unaudited financial statements
was prepared on a basis which reflected an estimate of what the assets,
liabilities and operations of OMNOVA Solutions would have been if it had been
organized as a separate legal entity, owning certain net assets of GenCorp Inc.
The accompanying unaudited combined financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These interim statements should be
read in conjunction with the audited financial statements and notes included in
the Registration Statement. As indicated in the notes to the audited financial
statements included in the Registration Statement, GenCorp provided certain
general and administrative services to OMNOVA Solutions prior to the Spin-off.
The cost for these services was allocated to OMNOVA Solutions based upon a
formula that includes sales, gross payroll, and average invested capital.
Management of OMNOVA Solutions believes that the allocation of cost for these
services is reasonable.
All normal recurring accruals and adjustments considered necessary for a
fair presentation of the unaudited results for the nine month period ended
August 31, 1999 and 1998, have been reflected. The results of operations for the
three and nine month periods ended August 31, 1999, are not necessarily
indicative, if annualized, of those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Historical earnings per share have not been presented as OMNOVA Solutions
was operated as a division of GenCorp and had no outstanding stock.
Segment operating profit represents net sales less applicable costs,
expenses and provisions for restructuring and unusual items relating to
operations. Segment operating profit excludes corporate income and expenses,
interest expense and income taxes.
-6-
<PAGE> 7
Note B - Comprehensive Income
- -----------------------------
OMNOVA Solutions adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), as of December 1, 1998, which
established standards for reporting and displaying comprehensive income and its
components in the financial statements. The adoption of SFAS 130, which had no
impact on OMNOVA Solutions' net income or divisional equity, requires
translation adjustments to be included in other comprehensive income.
Note C - Acquisitions and Joint Venture
- ---------------------------------------
Acquisitions
On April 27, 1999, OMNOVA Solutions acquired the global latex floor care
business of Morton International Inc. for $8 million.
On December 2, 1998, OMNOVA Solutions acquired the U.S. acrylic emulsion
polymers business of PolymerLatex, located in Fitchburg, Massachusetts, for $9
million, consisting of cash of $3 million and a note payable of $6 million due
December 1, 1999.
On October 29, 1998, OMNOVA Solutions acquired certain net assets of Sequa
Chemicals, the specialty chemicals unit of Sequa Corporation, for $108 million
in cash. This acquisition provided technology, customers and increased capacity
for an array of emulsion polymers and polymer hybrids including acrylics and
vinyl acetate. The preliminary purchase price allocation resulted in goodwill
and other intangible assets of approximately $61 million which are being
amortized over periods ranging from 5 to 40 years.
On August 14, 1998, OMNOVA Solutions acquired the commercial wallcovering
business of Walker Greenbank PLC, which is based in the United Kingdom, for $112
million in cash. The purchase price allocation resulted in goodwill and other
intangible assets of approximately $80 million which are being amortized over
periods ranging from 5 to 40 years.
On March 1, 1998, OMNOVA Solutions acquired The Goodyear Tire & Rubber
Company's Calhoun, Georgia latex facility for an aggregate consideration of $78
million, of which $74 million was paid in cash and $4 million was paid through
the retention of receivables. The acquisition resulted in goodwill and other
intangible assets of $59 million which are being amortized over periods ranging
from 3 to 40 years.
All of the above acquisitions were accounted for using the purchase method
and were included in the results of operations of OMNOVA Solutions from the
respective dates of acquisition.
Joint Venture
On August 4, 1999, OMNOVA Solutions formed a joint venture company with
Thailand-based conglomerate Charoen Pokphand Group. The new company, CPPC
Decorative Products Co., Ltd., will serve the decorative PVC film and fabric
markets in the Asia-Pacific region and provide expanded product lines to North
America and Europe. OMNOVA Solutions' initial investment in this joint venture
was $2 million.
-7-
<PAGE> 8
Note D - Unusual Items
- ----------------------
On December 14, 1998, OMNOVA Solutions sold its residential wallcovering
business to Blue Mountain Wallcoverings, Inc. for an aggregate consideration of
approximately $9 million. In the second quarter of 1998, OMNOVA Solutions
recognized unusual expense of $8 million related to exiting this business. This
unusual expense was subsequently adjusted to $3 million in the fourth quarter of
1998. Assets disposed of consisted of equipment and inventory with carrying
amounts of $8 million and $1 million, respectively. Trademarks and sample books
totaling $2 million were written off since they no longer had a use and
severance costs of $1 million were accrued. The payment of these costs related
to termination benefits to be paid to 21 employees. The payment of these
benefits occurred in the first quarter of fiscal year 1999.
Note E - Inventories
- --------------------
Inventories are stated at the lower of cost or market value. A portion of
the inventories is priced by use of the last-in, first-out (LIFO) method using
various dollar value pools. Interim LIFO determinations involve management's
judgments of expected year-end inventory levels. Components of inventory are as
follows:
<TABLE>
<CAPTION>
(Dollars in millions) August 31, November 30,
1999 1998
---------- ------------
<S> <C> <C>
Raw materials and supplies $ 27 $ 25
Work-in-process 5 5
Finished products 60 60
---- ----
Approximate replacement cost of inventories 92 90
Reserves, primarily LIFO (29) (33)
---- ----
$ 63 $ 57
==== ====
</TABLE>
Note F - Property, Plant and Equipment, Net
- -------------------------------------------
<TABLE>
<CAPTION>
August 31, November 30,
1999 1998
---------- ------------
<S> <C> <C>
Land $ 7 $ 7
Building and improvements 74 71
Machinery and equipment 267 281
Construction in progress 24 15
----- -----
372 374
Accumulated depreciation (174) (181)
----- -----
$ 198 $ 193
===== =====
</TABLE>
Note G - Long-term Debt and Credit Lines
- ----------------------------------------
On September 30, 1999, OMNOVA Solutions closed a new five-year unsecured
$300 million revolving credit facility. OMNOVA Solutions will pay a variable
commitment fee, which is currently .15 of one percent, on the unused balance.
Interest rates are variable, primarily based on LIBOR and were at an average
rate of 6.7 percent at September 30, 1999. The facility contains various debt,
dividend and investment restrictions and provisions requiring maintenance of an
earnings before interest, taxes, depreciation and amortization to interest
coverage (EBITDA/Interest Expense) ratio of 3.50 to 1.00 and debt to earnings
before interest, taxes, depreciation and amortization (Debt/ EBITDA) ratio of
3.25 to 1.00. The facility was utilized to fund a $200 million dividend paid to
GenCorp at the time of the Spin-off and will also be available for future
working capital, capital expenditures and acquisitions needs.
-8-
<PAGE> 9
Note H - Contingencies
- ----------------------
OMNOVA Solutions is subject to various legal actions and proceedings
relating to a wide range of matters. In the opinion of management, after
reviewing the information which is currently available with respect to such
matters and consulting with legal counsel, any liability which may ultimately be
incurred with respect to these matters will not materially affect the financial
condition of OMNOVA Solutions. The effect of resolution of these matters on
results of operations cannot be predicted because any such effect depends on
both future results of operations and the amount and timing of the resolution of
such matters.
Note I - OMNOVA Solutions Unaudited Pro Forma Condensed Combined Financial
- --------------------------------------------------------------------------
Statements
- ----------
The following unaudited pro forma condensed combined balance sheet as of
August 31, 1999 and the unaudited pro forma condensed statements of combined
income for the three and nine months ended August 31, 1999 give effect to OMNOVA
Solutions as a stand-alone entity. The pro forma condensed combined balance
sheet is presented as if the Spin-off had occurred on August 31, 1999, and the
pro forma condensed statements of combined income are presented as if the
Spin-off had occurred as of the beginning of the periods presented. These pro
forma combined financial statements reflect, among other things, the borrowing
by OMNOVA Solutions of $200 million and the payment of the borrowings by OMNOVA
Solutions to GenCorp in the form of a dividend. However, these pro forma
combined financial statements do not reflect nonrecurring items that are
directly attributable to the Spin-off and which will be incurred by OMNOVA
Solutions. These one-time costs are estimated at $2 million after tax and relate
primarily to retention bonuses for key employees and expenses associated with
establishing a new independent company. The pro forma information is presented
for illustrative purposes only and is not necessarily indicative of the results
that would have been obtained had the transactions actually occurred on the
dates assumed, nor is it necessarily indicative of the future combined results
of operations.
The pro forma condensed combined financial statements should be read in
conjunction with the historical combined financial statements and the related
notes thereto of OMNOVA Solutions included in the Registration Statement and in
this Quarterly Report on Form 10-Q.
-9-
<PAGE> 10
OMNOVA SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
August 31, 1999
<TABLE>
<CAPTION>
(Dollars in millions) PRO FORMA
HISTORICAL ------------------------
OMNOVA OMNOVA
ASSETS: SOLUTIONS ADJUSTMENTS SOLUTIONS
--------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6 $ 6
Accounts receivable, net 113 113
Inventories 63 63
Deferred income taxes 10 10
Prepaid expenses and other 4 4
----- -----
TOTAL CURRENT ASSETS 196 196
Prepaid pension - $ 42(1) 42
Property, plant and equipment, net 198 13(2) 211
Goodwill, net 157 157
Patents and other intangible assets, net 80 80
Other assets 8 1(2) 9
----- ----- -----
TOTAL ASSETS $ 639 $ 56 $ 695
===== ===== =====
LIABILITIES AND DIVISIONAL EQUITY:
CURRENT LIABILITIES
Notes payable $ 6 $ 6
Accounts payable 54 $ 3(2) 57
Accrued payroll and personal property taxes 10 10
Other current liabilities 25 3(1) 29
1(2)
----- ----- -----
TOTAL CURRENT LIABILITIES 95 7 102
Long-term debt - 200(3) 200
Postretirement benefits other than pensions - 51(1) 51
Deferred income taxes 14 - 14
Other liabilities 11 12(2) 23
----- ----- -----
TOTAL LIABILITIES 120 270 390
DIVISIONAL EQUITY 519 (214)(4) 305
----- ----- -----
TOTAL LIABILITIES AND DIVISIONAL EQUITY $ 639 $ 56 $ 695
===== ===== =====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet as of August
31, 1999.
-10-
<PAGE> 11
OMNOVA SOLUTIONS NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED BALANCE SHEET
as of August 31, 1999
(1)To record the transfer of net pension assets and retiree medical obligations
from GenCorp to OMNOVA Solutions. The estimated prepaid pension asset is
attributable to the excess of pension assets over liabilities related to OMNOVA
Solutions employees and retirees. The projected prepaid pension asset of $42
million and retiree medical benefit obligations of $54 million were actuarially
determined based on OMNOVA Solutions' active and retired participants in the
plans and the actuarial assumptions used were consistent with assumptions
previously used by GenCorp. The pension assets were split based on the
requirements of Section 414(i) of the Internal Revenue Code as prescribed by the
Pension Benefit Guaranty Corporation and other management considerations.
(2)To record the transfer of certain property, plant and equipment, primarily
GenCorp's corporate headquarters, related liabilities and deferred taxes from
GenCorp.
(3)Reflects the borrowing by OMNOVA Solutions of $200 million and the payment of
the borrowings by OMNOVA Solutions to GenCorp in the form of a dividend.
(4)To record the effect on divisional equity of the pro forma adjustments
referred to in notes (1), (2) and (3) above.
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Transfer of prepaid pension (1) $ 42
Transfer of postretirement benefits other than pensions (1) (54)
Transfer of certain property, plant and equipment and related
liabilities (2) (2)
Payment of dividend to GenCorp (3) (200)
-------
$ (214)
=======
</TABLE>
-11-
<PAGE> 12
OMNOVA SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF COMBINED INCOME
Three Months Ended August 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
------------------------
HISTORICAL
OMNOVA OMNOVA
SOLUTIONS ADJUSTMENTS SOLUTIONS
--------- ----------- ---------
(Dollars in millions, except per share data)
<S> <C> <C> <C>
NET SALES $ 203 $ - $ 203
COSTS AND EXPENSES
Cost of products sold 131 (2)(1) 129
Selling, general and administrative 40 (1)(1) 41
2 (2)
Depreciation 8 - 8
Interest expense 5 (2)(3) 3
Other (income) expense, net 2 - 2
----- ---- -----
186 (3) 183
----- ---- -----
INCOME BEFORE INCOME TAXES 17 3 20
Income taxes 7 1 (4) 8
----- ---- -----
NET INCOME $ 10 $ 2 $ 12
===== ==== =====
PRO FORMA NET INCOME PER SHARE:
Basic $ .29(5)
Diluted $ .29(5)
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic 41,826
Diluted 42,391
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Combined
Income for the three and nine months ended August 31, 1999.
-12-
<PAGE> 13
OMNOVA SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF COMBINED INCOME
Nine Months Ended August 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
HISTORICAL
OMNOVA OMNOVA
SOLUTIONS ADJUSTMENTS SOLUTIONS
--------- ----------- ---------
(Dollars in millions, except per share data)
<S> <C> <C> <C>
NET SALES $ 570 $ - $ 570
COSTS AND EXPENSES
Cost of products sold 368 (6)(1) 362
Selling, general and administrative 117 (3)(1) 120
6 (2)
Depreciation 20 - 20
Interest expense 15 (5)(3) 10
Other (income) expense, net 4 - 4
-------- ------ ---------
524 (8) 516
-------- ------ ---------
INCOME BEFORE INCOME TAXES 46 8 54
Income taxes 18 3 (4) 21
-------- ------ ---------
NET INCOME $ 28 $ 5 $ 33
======== ====== =========
PRO FORMA NET INCOME PER SHARE:
Basic $ .79(5)
Diluted $ .78(5)
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic 41,712
Diluted 42,192
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Combined
Income for the three and nine months ended August 31, 1999.
-13-
<PAGE> 14
OMNOVA SOLUTIONS NOTES TO UNAUDITED PRO FORMA
CONDENSED STATEMENTS OF COMBINED INCOME
For the three and nine months ended August 31, 1999
(1)To record the decrease in pension expense attributable to the transfer of a
portion of the excess of the defined benefit pension plans' assets over the
related obligations for OMNOVA Solutions employees and retirees.
(2)To transfer corporate costs that will be assumed by OMNOVA Solutions as a
result of the Spin-off. This adjustment also includes the cost associated with
the corporate assets and liabilities transferred from GenCorp. After the
Spin-off, these costs will no longer be incurred by GenCorp.
(3)To adjust interest expense to the amount computed based on the borrowing of
$200 million as a result of the Spin-off. The average interest rate on this
borrowing at September 30, 1999 was 6.7 percent. The interest rate was primarily
based on LIBOR. A quarter point change in the interest rate would result in a
$.1 million and a $.4 million charge in interest expense for the three and nine
months ended August 31, 1999.
(4)To record the estimated income taxes related to the pro forma adjustments
referred to in notes (1), (2) and (3) above at an estimated combined U.S.
federal and state income tax rate of 40 percent.
(5)The pro forma earnings per share were calculated based on a one for one
share distribution and equivalent stock options being granted to holders of
GenCorp stock options.
-14-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations Three Months Ended August 31, 1999 and 1998
- -----------------------------------------------------------------
Net sales for the OMNOVA Solutions businesses in the third quarter of 1999
increased 26 percent to $203 million compared to $161 million in the third
quarter of 1998. Sales increased in both Decorative & Building Products and
Performance Chemicals, primarily from sales attributable to acquisitions. Total
segment operating profit declined to $22 million for the third quarter of 1999
versus $23 million in the third quarter of 1998. Operating margins decreased to
10.8 percent in the third quarter of 1999 compared to 14.3 percent in the third
quarter of 1998, due to product mix in Decorative & Building Products, lower
average unit selling prices across certain Performance Chemicals product lines,
higher raw material prices and increased new product development spending.
Net sales for Performance Chemicals increased for the third quarter of 1999
by 38 percent to $83 million compared to $60 million in the third quarter of
1998. The increase reflects sales attributable to the 1998 acquisitions.
Excluding the effect of acquired businesses, volume was flat compared to 1998
while pricing was down slightly. Segment operating profit during the third
quarter of 1999 was $9 million versus $10 million in the third quarter of 1998.
Segment operating margins declined to 10.8 percent in the third quarter of 1999
versus 16.7 percent in the 1998 third quarter. The decline is primarily due to
lower pricing, customer deferral of planned volume increases of styrene
butadiene latex for the residential carpet industry, and integration costs
related to acquisition activity in the latter half of 1998.
During the third quarter of 1999, Performance Chemicals announced that it
had completed a strategic alliance agreement with Germany-based PolymerLatex (a
joint venture between Bayer AG and Degussa- Huls AG) to serve the needs of
OMNOVA Solutions' global paper customers. The relationship developed from the
acquisition of PolymerLatex's U.S. emulsion polymers business last December.
Net sales for Decorative & Building Products increased for the third quarter
of 1999 by 19 percent to $120 million compared to $101 million in the third
quarter of 1998. The increase was mainly related to the European wallcovering
acquisition, paper laminates and building systems businesses. Segment operating
profit during the third quarter of 1999 was $13 million, consistent with the
third quarter of 1998. Segment operating margins declined to 10.8 percent in the
third quarter of 1999 from 12.9 percent for the third quarter of 1998, due
primarily to increased spending on new product development, higher expenses
associated with the conversion of manufacturing processes to comply with new
clean air standards, and lower commercial wallcovering volumes resulting from
continuing market softness in the U.S. and the U.K., which could continue into
the foreseeable future.
During the third quarter of 1999, the Decorative & Building Products
business unit announced the formation of a joint venture company with
Thailand-based conglomerate Charoen Pokphand Group. The new company, CPPC
Decorative Products Co., Ltd., will serve the decorative PVC film and fabric
markets in the Asia-Pacific region and provide expanded product lines to North
America and Europe.
Results of Operations First Nine Months Fiscal 1999 Compared to Fiscal 1998
- ---------------------------------------------------------------------------
Net sales for the OMNOVA Solutions businesses in the first nine months of
1999 increased 27 percent to $570 million compared to $448 million in the first
nine months of 1998. Sales increased in both Decorative & Building Products and
Performance Chemicals, primarily from sales attributable to acquisitions. Total
segment operating profit increased 5 percent to $62 million for the first nine
months of 1999 versus $59 million in the first nine months of 1998 excluding an
unusual item. Operating margins decreased to 10.9 percent in the first nine
months of 1999 compared to 13.2 percent in the first nine months of 1998, due
primarily to lower average unit selling prices across certain Performance
Chemicals product lines, and increased new product development spending.
-15-
<PAGE> 16
Results of Operations First Nine Months Fiscal 1999 Compared to Fiscal 1998
- ---------------------------------------------------------------------------
(continued)
- -----------
Net sales for Performance Chemicals increased for the first nine months of
1999 by 48 percent to $239 million compared to $161 million in the first nine
months of 1998. The increase reflects sales attributable to the 1998
acquisitions. Excluding the effect of acquired businesses, volume was flat
compared to 1998 while pricing was down slightly. Segment operating profit of
$23 million for the first nine months of 1999 was even with the first nine
months of 1998. Segment operating margins declined to 9.6 percent in the first
nine months of 1999 versus 14.3 percent in the first nine months of 1998. The
decline is primarily due to lower pricing and integration costs related to
acquisition activity in the latter half of 1998.
During the first nine months of 1999, Performance Chemicals completed the $8
million acquisition of Morton International's global latex floor care business,
adding a complementary product line and customer base, and expanding its
presence in Europe and the Far East. Also during the first half of 1999,
Performance Chemicals acquired the U.S. acrylic emulsion polymers business of
PolymerLatex located in Fitchburg, Massachusetts for $9 million. This
acquisition strengthened and diversified markets in acrylic emulsions and other
specialty chemicals.
Net sales for Decorative & Building Products increased for the first nine
months of 1999 by 15 percent to $331 million compared to $287 million in the
first nine months of 1998. The increase was mainly related to the European
wallcovering acquisition, paper laminates and building systems businesses.
Segment operating profit during the first nine months of 1999 improved 8 percent
to $39 million versus $36 million in the first nine months of 1998 excluding an
unusual item. Segment operating margins declined to 11.8 percent for the first
nine months of 1999 versus 12.5 percent for the first nine months of 1998. The
decline is primarily due to increased spending on new product development and
lower commercial wallcovering volumes.
During fiscal 1998, Decorative & Building Products recorded a pre-tax
unusual expense of $8 million in the second quarter, which reduced segment
operating profit, related to exiting its residential wallcovering business. This
unusual expense was subsequently adjusted to $3 million in the fourth quarter of
fiscal 1998.
Interest expense allocated from GenCorp increased to $15 million in the
first nine months of 1999 compared to $5 million in the first nine months of
1998. The increase in interest expense relates to the increase in GenCorp's debt
from August 31, 1998 to August 31, 1999 due primarily to acquisitions made by
OMNOVA Solutions in 1998.
Financial Resources and Capital Spending
- ----------------------------------------
Cash flow provided by operating activities for the first nine months of
fiscal 1999 was $27 million as compared to $36 million in the first nine months
of 1998. The decrease in cash flow from operating activities primarily reflects
a higher working capital requirement.
For the first nine months of 1999, $27 million was used for investing
activities, including the acquisitions of the global latex floor care business
of Morton International Inc. for $8 million and the U.S. acrylics emulsion
business of PolymerLatex for $9 million, consisting of cash of $3 million and a
note for $6 million, and the investment of $2 million in the newly formed joint
venture company, CPPC Decorative Products Co., Ltd., and capital expenditures of
$23 million, offset by proceeds of $9 million from the sale of the residential
wallcovering business. This is compared to $198 million used for investing
activities in the first nine months of 1998, including acquisitions of Walker
Greenbank's Commercial Wallcovering business for $112 million and The Goodyear
Tire & Rubber Company's Calhoun, Georgia latex facility for $74 million and
capital expenditures of $12 million.
Cash flow provided by financing activities for the first nine months of
fiscal 1999 was $2 million compared to $164 million in the first nine months of
fiscal 1998. The increase in net transactions with GenCorp during fiscal 1998
was primarily due to cash required by OMNOVA Solutions for its fiscal 1998
acquisitions.
-16-
<PAGE> 17
Financial Resources and Capital Spending (continued)
- ----------------------------------------------------
On September 30, 1999, OMNOVA Solutions closed a new five-year unsecured
$300 million revolving credit facility. OMNOVA Solutions will pay a variable
commitment fee, which is currently .15 of one percent, on the unused balance.
Interest rates are variable, primarily based on LIBOR and were at an average
rate of 6.7 percent at September 30, 1999. The facility contains various debt,
dividend and investment restrictions and provisions requiring maintenance of an
earnings before interest, taxes, depreciation and amortization to interest
coverage (EBITDA/Interest Expense) ratio of 3.50 to 1.00 and debt to earnings
before interest, taxes, depreciation and amortization (Debt/ EBITDA) ratio of
3.25 to 1.00. The facility was utilized to fund a $200 million dividend paid to
GenCorp at the time of the Spin-off and will also be available for future
working capital, capital expenditures and acquisitions needs.
Based upon current and anticipated levels of operations and plans for
integrating recent acquisitions, OMNOVA Solutions believes that its cash flow
from operations, combined with borrowings that are available under its new
credit facility will be sufficient to enable OMNOVA Solutions to meet its
current and anticipated cash operating requirements, including scheduled
interest and principal payments, capital expenditures and working capital needs
for the next 12 months. However, actual capital requirements may change,
particularly as a result of any acquisitions which OMNOVA Solutions may make.
The ability of OMNOVA Solutions to meet its current and anticipated operating
requirements will be dependent upon the future performance of OMNOVA Solutions
which, in turn, will be subject to general economic conditions and to financial,
business and other factors, including factors beyond OMNOVA Solutions' control.
Depending on the nature, size and timing of future acquisitions, OMNOVA
Solutions may be required to raise additional financing. In addition, the tax
rules related to the Spin-off may limit OMNOVA Solutions' ability for a period
of time to fund acquisitions through the issuance of equity securities. See Item
7, "Certain Relationships and Related Transactions - Distribution Agreement" of
the Registration Statement. Substantially all of the debt of OMNOVA Solutions
will bear interest at variable rates; therefore, its liquidity and financial
condition is and will continue to be affected by changes in prevailing interest
rates.
Environmental Matters
- ---------------------
OMNOVA Solutions' policy is to conduct its businesses with due regard for
the preservation and protection of the environment. OMNOVA Solutions devotes
resources and management attention to environmental matters and actively manages
its ongoing processes to comply with extensive environmental laws and
regulations. OMNOVA Solutions' Combined Balance Sheet as of August 31, 1999
reflects environmental reserves of $2 million.
Management believes, on the basis of presently available information, that
resolution of environmental matters will not materially affect future results of
operations, liquidity, capital resources or the consolidated financial condition
of OMNOVA Solutions.
Information Systems and the Year 2000
- -------------------------------------
OMNOVA Solutions is currently engaged in a comprehensive project to upgrade
its information, technology, and manufacturing and facilities computer hardware
and software programs to address the Year 2000 issue at its domestic and
international businesses. Many of OMNOVA Solutions' systems include new hardware
and updated software packages purchased from established vendors who have
represented that these systems are Year 2000 ready. OMNOVA Solutions does not
have large centralized systems, a factor which OMNOVA Solutions believes,
reduces the risk of a single point of failure having widespread impact on OMNOVA
Solutions.
-17-
<PAGE> 18
Information Systems and the Year 2000 (continued)
- -------------------------------------------------
As part of this project, OMNOVA Solutions has formally communicated with all
of its significant suppliers, vendors and large customers to determine the
extent to which OMNOVA Solutions is vulnerable to those parties' failures to
correct their own Year 2000 issues. As of August 31, 1999, OMNOVA Solutions has
received approximately 96 percent of the responses, and those responses
generally indicate that these parties will be Year 2000 ready. All third parties
with whom OMNOVA Solutions has a material relationship have indicated that they
will be Year 2000 compliant.
The phases of the Year 2000 Compliance project for information technology
are awareness, inventory and assessment, remediation, testing, implementation,
and the last phase of control and monitoring. OMNOVA Solutions has completed the
awareness phase and the inventory and assessment phase of its information
technology systems. Both internal and external resources are being utilized to
test OMNOVA Solutions' software for Year 2000 readiness and, where necessary,
the systems are being remediated through upgrading, replacement, or
reprogramming. Also, OMNOVA Solutions has completed an inventory and assessment
of its non-information technology (embedded) systems, prioritizing the impact of
each of these systems on OMNOVA Solutions' ability to conduct its operations
and, as necessary, obtaining vendor verification and/or remediation of those
systems. The process of remediating, testing, and implementation will be an
iterative process until all critical systems are Year 2000 ready. Excluding late
1998 acquisitions, OMNOVA Solutions believes that approximately 95 percent of
its systems were Year 2000 ready as of August 31, 1999 and is in the control and
monitoring phase of the project. As of August 31, 1999, the late 1998
acquisitions are approximately 85 percent complete with the remediation stage,
which involves changing or upgrading systems. In addition, as of the same date,
the late 1998 acquisitions are approximately 75 percent complete with the
testing stage and approximately 75 percent complete with the implementation
stage, which involves placement of systems in a production environment. The late
1998 acquisitions are targeted for completion by October 31, 1999.
The estimated cost for this project is projected to range between $4 million
and $5 million, which is being funded through operating cash flows. OMNOVA
Solutions has spent approximately $4 million as of August 31, 1999 on this
project and expects to spend the remaining budget by the end of the fourth
quarter of 1999.
Based upon currently available information and considering OMNOVA Solutions'
diversified business base, decentralized systems and Year 2000 efforts,
management believes that the most reasonably likely worst case scenario could
result in minor short-term business interruptions. OMNOVA Solutions has prepared
contingency plans which include alternative sourcing to minimize any disruptions
to its businesses resulting from a vendor or supplier not being Year 2000 ready.
However, failure by OMNOVA Solutions and/or vendors and customers to complete
Year 2000 readiness work in a timely manner could have a material adverse effect
on certain of OMNOVA Solutions' operations. OMNOVA Solutions' exposure could
increase or its timetable for Year 2000 readiness could be delayed as a result
of any new acquisitions.
Adoption of the Euro
- --------------------
Based upon a preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on OMNOVA Solutions' international businesses. OMNOVA Solutions' foreign
operations currently are small and each operation conducts the majority of its
business in a single currency with minimal price variations between countries.
-18-
<PAGE> 19
Quantitative and Qualitative Disclosure About Market Risk
- ---------------------------------------------------------
OMNOVA Solutions is exposed to market risk from changes in interest rates on
long-term debt obligations. OMNOVA Solutions' policy is to manage its interest
rate exposures through the use of a combination of fixed and variable rate debt.
Currently, OMNOVA Solutions does not use derivative financial instruments to
manage its interest rate risk. Substantially all of OMNOVA Solutions' long-term
debt of $200 million that will be in place after the Spin-off will mature in the
year 2004 and will be variable. The average variable interest rate applicable to
this debt was 6.7 percent as of September 30, 1999. OMNOVA Solutions' long-term
debt under this debt agreement bears interest at market rates and therefore, any
carrying value would approximate fair value.
Although OMNOVA Solutions conducts business in foreign countries,
international operations were not material to OMNOVA Solutions' consolidated
financial position, results of operations or cash flows as of August 31, 1999.
Additionally, foreign currency transaction gains and losses were not material to
OMNOVA Solutions' results of operations for the nine months ended August 31,
1999. While international operations have not been significant in the past,
OMNOVA Solutions could be subject to material foreign currency exchange rate
risk with respect to future operations and cash flows due to OMNOVA Solutions'
acquisition of the European wallcovering business in late 1998. To date, OMNOVA
Solutions has not entered into any significant foreign currency forward exchange
contracts or other derivative financial instruments to hedge the effects of
adverse fluctuations in foreign currency exchange rates. OMNOVA Solutions is
evaluating the future use of these financial instruments.
Forward-Looking Statements
- --------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. These
statements present (without limitation) the expectations, beliefs, plans and
objectives of management and future financial performance and/or assumptions
underlying or judgments concerning matters discussed in this document. These
discussions and any other discussions contained in this report, except to the
extent that they contain historical facts, are forward-looking and accordingly
involve estimates, assumptions, judgments and uncertainties; in particular, this
pertains to management's comments on financial resources, capital spending and
the outlook for each of OMNOVA Solutions' business segments. The outcomes of
forward-looking statements and material contingencies could differ materially
from those discussed due to inherent economic risks and changes in prevailing
governmental policies and regulatory actions. In addition to certain contingency
matters and their respective cautionary statements discussed in the Registration
Statement, the Forward-Looking Statements section of this Management's
Discussion and Analysis indicates some important factors that could cause actual
results or outcomes to differ materially from those addressed in the
forward-looking statements.
Some important factors that could cause OMNOVA Solutions' actual results or
outcomes to differ from those expressed in its forward-looking statements
include, but are not limited to, the following:
- General economic trends affecting OMNOVA Solutions' markets
- Governmental and regulatory policies including environmental regulations
- OMNOVA Solutions' acquisition activities
- Raw material prices for chemical feed stocks including polyvinyl
chloride, styrene and butadiene
- The ability of OMNOVA Solutions and its customers and vendors to
successfully modify and convert their systems to be Year 2000 ready
- Fluctuations in exchange rates of foreign currencies and other risks
associated with foreign operations
-19-
<PAGE> 20
Forward-Looking Statements (continued)
- --------------------------------------
Additional risk factors may be described from time to time in OMNOVA
Solutions' filings with the Securities and Exchange Commission. All these risk
factors are difficult to predict, contain material uncertainties that may affect
actual results and may be beyond OMNOVA Solutions' control.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Quantitative and Qualitative Disclosure About Market
Risk."
-20-
<PAGE> 21
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
Table Exhibit
Item No. Exhibit Description Number
-------------------------------------------------------------------
27 Financial Data Schedule 27
(Filed for EDGAR only)
b) Reports on Form 8-K
--------------------
OMNOVA Solutions did not file any reports on Form 8-K during the
quarter ended August 31, 1999.
-21-
<PAGE> 22
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMNOVA SOLUTIONS INC.
Date October 13, 1999 By /s/ M. E. Hicks
-------------------- -------------------------------------
M. E. Hicks
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date October 13, 1999 By /s/ J. C. LeMay
-------------------- --------------------------------------
J. C. LeMay
Senior Vice President, Law; General Counsel
(Duly Authorized Officer)
-22-
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