<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 May 31, 2000 Commission File Number 1-15147
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 869-4200
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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 X NO
--- ---
At June 30, 2000, there were 39,576,001 outstanding shares of OMNOVA Solutions'
Common Stock, par value $0.10.
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OMNOVA SOLUTIONS INC.
Table of Contents
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended May 31, 2000 and 1999 -3-
Condensed Consolidated Balance Sheets -
May 31, 2000 and November 30, 1999 -4-
Condensed Consolidated Statements of Cash Flows -
Six Months Ended May 31, 2000 and 1999 -5-
Notes to the Unaudited Interim Condensed Consolidated
Financial Statements as of May 31, 2000 -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -11-
Item 3. Quantitative and Qualitative Disclosure About Market Risk -14-
Part II. Other Information
Item 1. Legal Proceedings -14-
Item 6. Exhibits and Reports on Form 8-K -14-
Signatures -16-
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
OMNOVA SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----- ------ ----- ------
<S> <C> <C> <C> <C>
NET SALES $ 198.5 $ 195.9 $ 380.7 $ 367.1
COSTS AND EXPENSES
Cost of products sold 140.4 125.9 267.5 235.6
Selling, general and administrative 40.4 39.2 80.9 76.6
Depreciation and amortization 8.6 7.7 17.2 15.6
Interest expense 3.9 5.0 7.8 9.9
Other (income) expense, net .2 (.3) (.2) (.3)
Unusual items (.3) .5 .2 .5
------- ------- -------- --------
193.2 178.0 373.4 337.9
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 5.3 17.9 7.3 29.2
Income tax provision (2.1) (7.2) (2.9) (11.7)
------- ------- ------- -------
NET INCOME $ 3.2 $ 10.7 $ 4.4 $ 17.5
======== ======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .08 $ .26 $ .11 $ .42
Diluted $ .08 $ .25 $ .11 $ .42
Average shares outstanding (in thousands)
Basic 39,965 41,748 40,625 41,658
Diluted 39,998 42,200 40,693 42,108
Cash dividends paid per share of common stock $ .05 $ .15 $ .10 $ .30
</TABLE>
See notes to the unaudited interim condensed consolidated financial
statements.
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OMNOVA SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
May 31, November 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 6.8 $ 10.5
Accounts receivable, net 49.3 122.0
Inventories 68.8 68.4
Deferred income taxes 11.6 11.6
Prepaid expenses and other 9.5 9.3
---------- ----------
TOTAL CURRENT ASSETS 146.0 221.8
Property, plant and equipment, net 214.0 212.0
Goodwill, net 155.8 158.4
Patents and other intangible assets, net 76.7 78.4
Prepaid pension 43.1 41.4
Other assets 14.8 10.5
---------- ----------
TOTAL ASSETS $ 650.4 $ 722.5
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES
Notes payable $ 4.0 $ 10.5
Accounts payable 81.2 82.9
Accrued payroll and personal property taxes 13.7 16.7
Other current liabilities 15.9 20.3
---------- ----------
TOTAL CURRENT LIABILITIES 114.8 130.4
Long-term debt 150.0 190.0
Postretirement benefits other than pensions 51.2 51.7
Deferred income taxes 18.1 16.3
Other liabilities 19.1 19.4
SHAREHOLDERS' EQUITY
Preference stock - $1.00 par value; 15 million shares authorized;
none outstanding -- --
Common stock - $0.10 par value; 135 million shares authorized;
41.8 million shares outstanding 4.2 4.2
Additional contributed capital 308.5 308.5
Retained earnings 2.2 1.8
Accumulated other comprehensive (loss) income (3.6) .2
Cost of shares of common stock in treasury
(2.2 million shares in 2000; none in 1999) (14.1) --
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 297.2 314.7
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 650.4 $ 722.5
========== ==========
</TABLE>
See notes to the unaudited interim condensed consolidated financial
statements.
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OMNOVA SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
May 31,
----------------------
2000 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 4.4 $ 17.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for unusual items .5 --
Depreciation, amortization and (gain)/loss on disposal of fixed assets 16.8 15.7
Changes in operating assets and liabilities net of effects of
acquisitions and dispositions of businesses:
Current assets 69.9 (12.8)
Current liabilities (9.1) (10.5)
Other non-current assets 1.7 4.0
Other non-current liabilities 1.0 --
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 85.2 13.9
------- --------
INVESTING ACTIVITIES
Capital expenditures (16.6) (13.7)
Proceeds from business and asset dispositions -- 9.0
Business acquisitions (3.9) (11.3)
------ --------
NET CASH USED IN INVESTING ACTIVITIES (20.5) (16.0)
------ --------
FINANCING ACTIVITIES
Long-term debt incurred 50.0 --
Long-term debt paid (90.0) --
Net short-term debt paid (6.5) --
Dividends (4.0) --
Purchase of treasury shares (14.1) --
Other (3.8) --
Net transactions with GenCorp Inc. -- 4.6
------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (68.4) 4.6
------ --------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (3.7) 2.5
Cash and equivalents at beginning of year 10.5 3.5
------- --------
Cash and equivalents at end of period $ 6.8 $ 6.0
======= ========
</TABLE>
Cash paid for interest and income taxes was $8.3 million and $3.9 million for
the six months ended May 31, 2000. Cash paid for interest and income taxes for
the six months ended May 31, 1999 was paid by GenCorp Inc. and was included in
net transactions with GenCorp Inc. prior to the spin-off.
See notes to the unaudited interim condensed consolidated financial
statements.
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<PAGE> 6
OMNOVA SOLUTIONS INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 financial statements and notes
thereto included in the OMNOVA Solutions Inc. (OMNOVA Solutions or the Company)
Annual Report on Form 10-K for the fiscal year ended November 30, 1999.
OMNOVA Solutions develops, manufactures and markets decorative and
functional surfaces, emulsion polymers, and specialty chemicals 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
certain corporate assets and the assets related to these businesses and OMNOVA
Solutions assumed liabilities related to the assets and businesses transferred
and issued 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.
Financial data included in the accompanying unaudited interim consolidated
financial statements for the six month period ended May 31, 1999 were prepared
on a combined basis; however, for financial statement reporting purposes, the
financial statements for all periods presented are labeled as consolidated. They
reflect the historical operations of OMNOVA Solutions businesses prior to the
spin-off.
As indicated in the notes to the audited financial statements included in
the Annual Report, 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 included 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 six month period ended May
31, 2000 have been reflected. The results of operations for the six month period
ended May 31, 2000 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.
Segment operating profit represents net sales less applicable costs and
expenses relating to operations. Segment operating profit excludes corporate
income and expenses, provisions for unusual items, interest expense and income
taxes.
Certain reclassifications have been made to conform prior year's data to the
current presentation.
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<PAGE> 7
'
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Unaudited
Three Months Ended Six Months Ended
(Dollars in millions, except per share amounts May 31, May 31,
and shares in thousands) ------------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR
Net income $ 3.2 $ 10.7 $ 4.4 $ 17.5
====== ====== ====== =======
DENOMINATOR
Denominator for basic earnings per share -
weighted average shares 39,965 41,748 40,625 41,658
Effect of dilutive securities:
Employee stock options 33 452 68 450
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 39,998 42,200 40,693 42,108
====== ====== ======== =======
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .08 $ .26 $ .11 $ .42
====== ====== ====== =======
Diluted $ .08 $ .25 $ .11 $ .42
====== ====== ====== =======
</TABLE>
On November 29, 1999, the Company announced that its Board of Directors
authorized the purchase from time to time of up to $25 million of OMNOVA
Solutions' common stock. The stock repurchases may be made over a period of up
to 18 months, principally through open market transactions or in
privately-negotiated transactions in accordance with applicable regulations of
the Securities and Exchange Commission. Depending on market conditions and other
factors, such purchases may be commenced or suspended at any time without prior
notice. During the first six months of 2000, approximately 2.2 million shares
were repurchased at a total cost of $14.1 million.
NOTE C - COMPREHENSIVE INCOME
The components of total comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
------------------------- ------------------
(Dollars in millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3.2 $ 10.7 $ 4.4 $ 17.5
Adjustments
Foreign currency translation effect (2.6) (1.1) (3.8) (1.4)
------ -------- ------- --------
Total comprehensive income $ .6 $ 9.6 $ .6 $ 16.1
====== ======== ======= ========
</TABLE>
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<PAGE> 8
NOTE D - ACQUISITIONS, DIVESTITURES AND OTHER MATTERS
On May 1, 2000, the Company entered into an asset purchase agreement for the
specialty/textile coatings business of High Point Textile Auxiliaries LLC for
$0.9 million. The acquisition was accounted for using the purchase method and
was included in the results of operations of the Company from the date of
acquisition. The purchase agreement includes contingent payments of $2.9
million, if certain production and sales levels are attained by April 30, 2001.
On March 16, 2000, the Company formed a joint venture company with C.P.
Chemicals Co. Ltd. The new company, Decorative Products (Singapore) Pte. Ltd.,
will serve the decorative PVC film and fabric markets in the Asia-Pacific
region. The Company's initial investment was $3 million and is being accounted
for using the equity method.
On April 27, 1999, the Company acquired the global latex floor care business
of Morton International Inc. for $8 million. On December 2, 1998, the Company
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. The acquisitions were accounted
for using the purchase method and were included in the results of operations of
the Company from the respective dates of acquisition.
NOTE E - RECEIVABLES SALE
On May 1, 2000 the Company formed a wholly-owned subsidiary, OMNOVA
Receivables Corp., a qualifying special-purpose entity (SPE), and entered into
an agreement whereby the Company may sell up to $75 million of trade
receivables through the SPE. At May 31, 2000, the $75 million available under
the program was fully utilized. The allowance for doubtful accounts has been
retained on the Company's consolidated balance sheet. The sale was reflected as
reductions of trade accounts receivable and the related recurring costs of the
program were recorded as other expense and totaled $0.4 million for the
quarter. The initial one-time fees of $0.2 million were recorded as an unusual
item. The proceeds from the sale were used to reduce borrowings under committed
lines of credit and are reported as operating cash flows in the Company's
consolidated statement of cash flows.
NOTE F - UNUSUAL ITEMS
During the first six months of fiscal 2000, the Company had unusual items
resulting in expense of $0.2 million. These unusual items included a gain on the
sale of the Company's airplane hangar for $0.5 million, offset by one-time
arrangement fees of $0.2 million to facilitate the receivable sale program and a
$0.5 million charge related to a loss recognized for fully reserving an accounts
receivable balance from a customer that filed for bankruptcy.
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<PAGE> 9
NOTE G - 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>
May 31, November 30,
(Dollars in millions) 2000 1999
---- ----
<S> <C> <C>
Raw materials and supplies $ 28.9 $ 31.1
Work-in-process 6.1 5.9
Finished products 68.1 65.6
--------- ---------
Approximate replacement cost of inventories 103.1 102.6
Reserves, primarily LIFO (34.3) (34.2)
--------- ---------
$ 68.8 $ 68.4
========= =========
NOTE H - PROPERTY, PLANT AND EQUIPMENT, NET
May 31, November 30,
(Dollars in millions) 2000 1999
---- ----
Land $ 9.5 $ 9.7
Building and improvements 88.2 89.5
Machinery and equipment 297.0 296.7
Construction in progress 29.7 16.3
--------- ---------
424.4 412.2
Accumulated depreciation (210.4) (200.2)
--------- ---------
$ 214.0 $ 212.0
========= ========
</TABLE>
NOTE I - LONG-TERM DEBT AND CREDIT LINES
On September 30, 1999, the Company entered into a five-year unsecured $300
million revolving credit facility (Facility) which expires in September 2004. At
May 31, 2000, the unused and available balance under this Facility was $150
million. The Company pays a variable commitment fee, which is currently .30 of
one percent, on the unused balance. Interest rates are variable, primarily based
on LIBOR, and were at an average rate of 7.37 percent at May 31, 2000. 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 3.5 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
is also available for working capital, capital expenditures and acquisition
needs.
At May 31, 2000, the Company had unsecured, uncommitted lines of credit with
several banks for short-term borrowings aggregating $25 million, of which $4
million was outstanding. Interest rates for these lines of credit were variable
and were at an average rate of 7.03 percent on May 31, 2000. Borrowings under
such lines are payable on demand. The Company also had outstanding letters of
credit totaling $1.1 million at May 31, 2000.
NOTE J - CONTINGENCIES
OMNOVA Solutions is subject to various legal actions and governmental
proceedings. 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 future results of operations, liquidity or
financial condition of the Company.
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<PAGE> 10
NOTE K - SEGMENTS
The Company operates two business segments, Decorative & Building Products
and Performance Chemicals. The Company's reportable segments are strategic
business units that offer different products and services.
Segment operating profit represents net sales less applicable costs and
expenses relating to operations. Segment operating profit excludes corporate
income and expense, provisions for unusual items, interest expense and income
taxes.
The following table sets forth a summary of operations for the quarter by
segment and a reconciliation to consolidated income before taxes:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
------------------------- -------------------------
(Dollars in millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES
Decorative & Building Products $ 110.3 $ 113.9 $ 212.1 $ 211.4
Performance Chemicals 88.2 82.0 168.6 155.7
--------- -------- --------- --------
$ 198.5 $ 195.9 $ 380.7 $ 367.1
INCOME
Decorative & Building Products $ 12.2 $ 14.6 $ 21.2 $ 26.2
Performance Chemicals .4 9.3 .6 15.1
--------- -------- --------- --------
SEGMENT OPERATING PROFIT 12.6 23.9 21.8 41.3
Interest expense (3.9) (5.0) (7.8) (9.9)
Corporate other income and (expense), net (1.7) -- (2.5) --
Corporate expenses (2.0) (.5) (4.0) (1.7)
Unusual items .3 (.5) (.2) (.5)
--------- --------- --------- --------
Income before taxes $ 5.3 $ 17.9 $ 7.3 $ 29.2
========= ======== ========= ========
</TABLE>
NOTE L - SUBSEQUENT EVENTS
On June 27, 2000 the Company announced that a joint venture formed by
subsidiaries of OMNOVA Solutions Inc. and Thailand-based Charoen Pokphand
Petrochemical Co., Ltd. had acquired a Shanghai, China-based PVC coated fabrics
business. The joint venture's Chinese operation will be headquartered in
Shanghai and will operate under the Name CG-OMNOVA Decorative Products
(Shanghai) Co., Ltd. The joint venture will focus on a broad range of
medium-to-high end PVC coated fabrics used in home furnishings, outerwear,
luggage and accessories. The Company's initial investment was $5 million and
will be accounted for under the equity method.
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<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS SIX MONTHS ENDED MAY 31, 2000 AND 1999
Net sales totaled $198 million for the second quarter of fiscal 2000, an
increase of 1 percent compared to $196 million during the second quarter of
1999. The increase was led by specialty and paper chemicals, roofing systems and
coated fabrics. Similarly, year-to-date sales increased 4 percent to $381
million compared to $367 million during the period a year ago.
Total segment operating profit declined to $13 million for the second
quarter of fiscal 2000 versus $24 million in the second quarter of 1999, as the
current quarter was negatively impacted by continued higher raw material costs
of approximately $14 million. Higher raw material costs were also prevalent for
the six months ended May 31, 2000 as segment operating profit decreased to $22
million as compared to $41 million during last year's period, a 47 percent
decline.
Net income for the second quarter was $3 million or $.08 per share
(diluted), down from last year's net income of $11 million or $.25 per share
(diluted). Net income was adversely impacted by significantly higher crude
oil-derived raw material prices in the quarter. Although the Company experienced
some important successes during the second quarter in its continuing efforts to
increase product prices, the increases implemented to date have not been
adequate to restore historical operating margins.
Net sales for the Decorative & Building Products segment decreased 3 percent
to $110 million in the second quarter of fiscal 2000 compared to $114 million
for the same period a year ago. The decrease resulted from a decline in
wallcovering sales due to planned changes in key North American distributor
relationships, and in decorative laminate sales as a result of the continued
downturn in the manufactured housing industry. The decrease was offset by
increases in sales of roofing systems and coated fabrics due to new product
introductions and marketing initiatives.
Segment operating profit for Decorative & Building Products during the
second quarter of fiscal 2000 declined to $12 million from $15 million in the
second quarter of 1999. Segment operating margins declined to 11.1 percent in
the second quarter of 2000 from 12.8 percent in the same period a year ago
primarily due to higher raw material costs, product mix and increased new
product development spending. PVC resin prices increased approximately $2
million compared to the second quarter of 1999. For the six months ended May 31,
2000, segment operating profit decreased to $21 million from $26 million, a
decline of 19 percent. The segment has implemented price increases during the
first six months of this year which have partially offset higher costs in coated
fabrics, roofing systems and wallcoverings.
Net sales for the Performance Chemicals segment in the second quarter of
fiscal 2000 increased 8 percent to $88 million compared to $82 million in the
second quarter of 1999. The increase resulted from volume increases excluding
acquisitions of 7 percent, as well as achieving some success with price
increases.
Segment operating profit for Performance Chemicals during the second quarter
of fiscal 2000 declined to $0.4 million from $9 million in the second quarter of
1999. Segment operating margins declined to 0.5 percent in the second quarter of
2000 from 11.3 percent in the same period a year ago primarily due to
significantly higher raw material prices which adversely impacted operating
profit by $12 million. The Company has successfully introduced product price
increases in specialty chemicals and carpet and textile markets, while price
increases for the paper business are now beginning to materialize. The segment's
operating margins are expected to improve in the last six months of this year,
but results will be highly dependent on future raw material pricing and the
successful implementation of price increases for the Company's products. For the
six months ended May 31, 2000 segment operating profit decreased to $1 million
from $15 million, a decline of 96 percent. The decline was directly attributable
to significantly higher raw material prices for styrene and butadiene monomers.
-11-
<PAGE> 12
RESULTS OF OPERATIONS SIX MONTHS ENDED MAY 31, 2000 AND 1999 (CONTINUED)
During the quarter, the Company finalized the acquisition of the specialty/
textile coatings business of High Point Textile Auxiliaries, LLC, a subsidiary
of Kao Corporation. The acquisition will broaden product offerings and combine
value-added compounding capabilities. The products will be produced at
Performance Chemicals' Greensboro, North Carolina plant.
FINANCIAL RESOURCES AND CAPITAL SPENDING
Cash flow provided by operating activities for the first six months of
fiscal 2000 was $85 million as compared to $14 million in the first six months
of 1999. The change was primarily due to the receivables sale of $75 million.
For the first six months of 2000, $21 million was used for investing
activities, which included the acquisitions of the specialty/textile coating
business for $1 million, additional capital investment of $3 million for the
Singapore investment and capital expenditures of $17 million. During the first
six months of 1999, $16 million was used for investing activities, which
included the acquisitions of the global latex floor care business of Morton
International for $8 million and the Fitchburg, Massachusetts facility for $9
million (of which $3 million was paid in cash). The Company also had capital
expenditures of $14 million offset by $9 million from proceeds from asset
dispositions during the first half of 1999.
For the first six months of 2000, $68 million was used for financing
activities, which included the Company's share repurchase program, and the use
of proceeds from the receivables sale described in Note E on page 8, to reduce
existing debt. The Company expects to save $0.5 million on an annual basis from
the receivables sale program. For the same period a year ago, cash flow provided
by financing activities was $5 million.
As described in Note I on page 9, the Company has an unsecured $300
million revolving credit facility which expires in September 2004. At May 31,
2000, the unused and available balance under this Facility was $150 million.
The Company pays a variable commitment fee, which is currently .30 of one
percent, on the unused balance. Interest rates are variable, primarily based on
LIBOR and were at an average rate of 7.37 percent at May 31, 2000. The Facility
is available for working capital, capital expenditures and acquisition needs.
Based upon current and anticipated levels of operation and plans for
integrating recent acquisitions, management believes that cash flow from
operations, combined with borrowings that are available under the credit
facility, will be sufficient to enable the Company to meet its current and
anticipated cash operating requirements, including scheduled interest and
principal payments, capital expenditures and working capital needs for the next
twelve months. However, actual capital requirements may change, particularly as
a result of any acquisitions which the Company may make. The Company's ability
to meet its current and anticipated operating requirements will be dependent
upon the Company's future performance which, in turn, will be subject to general
economic conditions and to financial, business and other factors, including some
factors beyond the Company's control. Depending on the nature, size and timing
of future acquisitions, the Company may be required to raise additional
financing. In addition, the tax rules related to the spin-off may limit the
Company's ability for a period of time to fund acquisitions through the issuance
of equity securities. Substantially all of the debt of OMNOVA Solutions will
bear interest at variable rates; therefore, its liquidity and financial
condition are and will continue to be, affected by changes in prevailing
interest rates.
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<PAGE> 13
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' Condensed Consolidated Balance Sheet as of May
31, 2000 reflects environmental reserves of $1.2 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 the
Company.
ADOPTION OF THE EURO
Management believes that the adoption of the Euro by the European Economic
Community will not have a material impact on the Company's international
businesses. The Company's foreign operations currently are small and each
operation conducts the majority of its business in a single currency with
minimal price variations between countries.
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 report. 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 and capital spending.
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 Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 1999, and in the Company's Quarterly Report on Form 10-Q for the
quarter ended February 29, 2000, 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
- Raw material prices for chemical feed stocks including polyvinyl
chloride, styrene and butadiene
- Procurement of raw materials feed stocks
- Governmental and regulatory policies including environmental
regulations
- OMNOVA Solutions' acquisition activities
- Fluctuations in exchange rates of foreign currencies and other risks
associated with foreign operations
- OMNOVA Solutions' ability to obtain financing at anticipated rates
- Expected continued benefits from integration of acquisitions
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 the Company's control.
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<PAGE> 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk
-----------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company's practice is to manage its interest
rate exposures through the use of a combination of fixed and variable rate debt.
Currently the Company does not use derivative financial instruments to manage
its interest rate risk. Substantially all of OMNOVA Solutions' long-term debt,
which is under the revolving credit facility described in Note I on page 9,
matures in the year 2004 and is variable. The average variable interest rate
applicable to this debt was 7.37 percent as of May 31, 2000. Since OMNOVA
Solutions' long-term debt under this agreement bears interest at market rates,
the carrying value approximates fair value.
Although OMNOVA Solutions conducts business in foreign countries,
international operations were not material to the Company's consolidated
financial position, results of operations or cash flows as of May 31, 2000.
While international operations have not been significant in the past, the
Company 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, the Company 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, but will continue to evaluate
the future use of these financial instruments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
Information concerning legal proceedings, including environmental matters,
which appears in Note J on page 9 of this report, is incorporated herein by
reference. Based upon information which is currently available and consulting
with legal counsel, none of such legal proceeding is believed to constitute a
"material pending legal proceedings" within the meaning of Item 103 of
Regulation S-K (17 CFR Reg. 229.103) and the Instructions thereto.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a) EXHIBITS
Exhibit Description
-------------------------------------------------------------------
3.1 Amended and Restated Articles of OMNOVA Solutions Inc. (as
filed with the Secretary of State of Ohio on September 17,
1999).
3.2 Amended and Restated Code of Regulations of
OMNOVA Solutions Inc.
Material Contracts
------------------
10.1 Receivables Sale Agreement Dated as of May 1, 2000 Between
OMNOVA Solutions Inc. as Seller, and OMNOVA Receivables
Corporation, as Buyer.
10.2 Receivables Purchase Agreement Dated as of May 1, 2000
Among OMNOVA Receivables Corporation, OMNOVA
Solutions Inc., Falcon Asset Securitization Corporation
and Bank One, N.A.
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<PAGE> 15
Exhibit Description
-----------------------------------------------------------------------
10.3* Amended and Restated Severance Agreement Dated as of January
4, 2000 granted to Kevin M. McMullen by OMNOVA Solutions Inc.
10.4* Director and Officer Indemnification Agreement Dated as of
March 29, 2000 granted to Kevin M. McMullen by OMNOVA
Solutions Inc.
27 Financial Data Schedule.
(Filed for EDGAR only)
*Management Contract or Compensatory Arrangement.
b) Reports on Form 8-K
-------------------
OMNOVA Solutions did not file any reports on Form 8-K during the
quarter ended May 31, 2000.
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<PAGE> 16
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 July 10, 2000 By /s/ M.E. Hicks
--------------------- -------------------------------
M. E. Hicks
Senior Vice President and Chief
Financial Officer
Date July 10, 2000 By /s/ J.C. LeMay
--------------------- -------------------------------
J. C. LeMay
Senior Vice President, Law;
General Counsel
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