Leadership. Discipline. Opportunities.
20 07 ANNUAL REPORT AND 10K
Global Capability. OMNOVA’s acquisition of the remaining 49%
interest in its Asian joint ventures enhances its ability to serve cus-
tomers around the world. The Decorative Products Taicang, China
plant is featured here. Among the many products manufactured
in Asia is upholstery for school bus and marine seating (below).
The Decorative Products business also has operations in Europe,
including a design studio outside London (lower left).
To Our Shareholders:
Record sales growth reflected a year of substantial progress
for OMNOVA Solutions on many fronts. OMNOVA grew sales
by nearly 7% to $746 million as the strong performance of both
business segments – Performance Chemicals and Decorative
Products – exceeded the rate of growth of our underlying
markets. This growth was all organic and came from three
areas we established as priorities: market share gains in our
served markets; leveraging our technology and manufacturing
competencies to enter new, related markets; and further global
expansion.
Our exciting lineup of innovative new products, enhanced
by an improved new product development capability, helped
us achieve this growth. We further strengthened our ability to
grow and to better serve rapidly growing regions of the world
with our announcement in January 2008 that OMNOVA is now
sole owner of our strategic Decorative Products operations in
China and Thailand, following our purchase of the remaining
49% stake held by our former joint venture partner.
Income from continuing operations for 2007, including the
OMNOVA’s pilot paper coater (below) provides a state-of-the-art
product development capability that enables the Performance
Chemicals business to test new latex coatings under customer
paper mill operating conditions.
Kevin M. McMullen Chairman and CEO
mid-year debt refinancing costs of $12.4 million, was a loss of
material costs were up in Asia, too, due to strong demand.
$7.0 million. However, excluding the debt refinancing costs, our
We increased pricing for our products by $11.6 million but
sales growth – along with reduced interest and selling, general
were unable to completely keep up with the rapid pace of raw
and administrative costs – would have enabled the Company to
material cost inflation, as well as the substantial jump in freight
achieve income from continuing operations of $5.4 million.
costs, which increased $4.0 million.
OMNOVA’s progress was particularly significant given the
strong headwinds we faced from an operating environment that
was even more challenging in 2007. The U.S. home mortgage
crisis that led to the slowing of several of our markets in late
2006 intensified during 2007, affecting sales of carpet and
construction chemicals and laminates for kitchen and bath
cabinets. The effects of tighter credit, higher energy prices and
lower consumer confidence spread into the marine, furniture
and recreational vehicle/manufactured housing sectors, and
even spilled over into the commercial interiors markets, which
had started the year strong.
The price of oil, which had “moderated” to $55 a barrel in
LEA DERS HIP
OMNOVA further strengthened its leadership positions in
most of our key markets, which allowed us to achieve improved
results despite the very difficult operating conditions. Strong
core technical competencies, a significantly lower cost base,
a customer-centric service model, breadth of manufacturing
scale and a continuous pipeline of new products all combined
to make OMNOVA the supplier of choice. Add to that an
expanding global capability and adaptability to changing
customer and market needs, and one can see why we were able
to successfully forge ahead in 2007.
January 2007, surged to nearly $100 a barrel by year-end. This
Market Share Growth
unprecedented march to the century mark caused OMNOVA’s
In paper coating chemicals, where OMNOVA has a strong
raw material costs to increase $18.6 million year-over-year. Raw
number two position, we grew sales in a market that was down
overall. Our GenCryl Pt® latex, a new standard in the industry
because of its higher performance features such as greater
OMNOVA SOLUTIONS INC. 1
strength and improved printability, drove significant year-over-
Collection™ enables us to meet the requirement for high quality,
year business wins.
ultra-thin laminates used on walls and ceilings.
Likewise, our growing presence in marine upholstery and
The industry structure in Decorative Products is very
laminate trim is reflected in several new accounts, including
fragmented, and we continue to see opportunities to leverage
business with one of the world’s largest boat builders. While
our leadership position – now enhanced even further with the
the marine industry was down in 2007, OMNOVA’s market share
full ownership of our Asian manufacturing operations – to better
growth demonstrates the confidence and desire of customers
meet the needs of customers and expand our market standing
to partner with us to deliver an innovative offering that can drive
as the industry continues to consolidate.
future growth. This new business will take full effect in 2008.
Further market share gains were realized across our
laminate and coated fabric product lines as OMNOVA seized
opportunities to pick up key accounts. As a result, we expanded
our position in transportation upholstery, most notably bus
seating, and in laminates for the RV/manufactured housing
market. In the case of the latter, OMNOVA’s new Design4
New Products…New, Related Markets
Innovative new products are spearheading our market
expansion and enabling us to move into new, related markets.
Nowhere was the importance of new products and markets
more evident than in our specialty chemicals product line, where
sales were up 10%. End uses run a wide spectrum in categories
F I N A N C I A L H I G H L I G H T S
(Dollars in millions, except per share data)
Net Sales
Performance Chemicals
Decorative Products
Segment Operating Profit (Loss)(1)
Performance Chemicals
Decorative Products
Interest expense
Corporate expenses
Debt redemption expense
Income tax (expense) benefit
Income (Loss) From Continuing Operations
Discontinued operations(2)
Net Income (Loss)
Basic Income (Loss) Per Share
Income (Loss) per share from continuing operations
Discontinued operations
Net income (loss) per share
Diluted Income (Loss) Per Share
Income (loss) per share from continuing operations
Discontinued operations
Net income (loss) per share
Other Data
Capital expenditures
Depreciation and amortization
Number of employees at year-end
Number of outstanding shares for diluted EPS (millions)
2007
$ 475.3
270.2
$ 745.5
$
$
$
$
$
23.8
8.6
(16.5)
(10.4)
(12.4)
(.1)
(7.0)
.3
(6.7)
(.17)
.01
(.16)
(.17)
.01
(.16)
Years Ended November 30,
2006
2005
$ 441.6
257.5
$ 699.1
$ 452.8
242.2
$ 695.0
$
$
$
$
$
$
29.7
9.0
(21.3)
(14.1)
–
(.1)
3.2
18.1
21.3
.08
.44
.52
.08
.43
.51
$
$
$
$
$
$
33.8
(2.8)
(22.6)
(11.4)
–
.3
(2.7)
.9
(1.8)
(.06)
.02
(.04)
(.06)
.02
(.04)
$
$
16.2
20.1
1,640
41.8
$
$
13.0
20.2
1,700
41.6
$
$
12.4
21.1
1,700
40.7
(1) Segment operating profit for the years of 2007, 2006 and 2005 was impacted by a number of items which are discussed in this annual report.
These items include for 2007, restructuring and severance charges of $0.8 million and a gain on the sale of a building of $0.7 million; for 2006,
trademark and asset impairment charges of $1.1 million and restructuring and severance charges of $1.1 million; for 2005, restructuring and
severance charges of $5.8 million, asset impairment charges of $2.5 million, a gain on legal settlement of $0.9 million, a gain on the sale of a
brand of $0.8 million and work stoppage charges of $1.7 million. Management excludes these items when evaluating the results of the Company’s
business segments.
(2) Discontinued operations for 2006 included the gain on the sale of the Company’s Building Products business of approximately $18.2 million.
2
OMNOVA SOLUTIONS INC.
that include chemicals used in nonwovens, construction, floor
care products, industrial coatings, tape and adhesives. Here are
just a few of the exciting new specialty chemical products and
applications:
•
In construction, OMNOVA has leveraged its broad
range of chemistries to develop solutions for oil and natural gas
drilling, exterior sheathing, fiberglass roofing mat and tile roof
underlay, ceiling tiles and concrete coatings.
•
In floor care, our new OmnaGlo™ 100 product is the
first use of styrene butadiene chemistry in floor polishes – one
of the most significant innovations in floor care technology in
the last 50 years. This product provides exceptional gloss and
detergent resistance, creating an excellent value proposition for
Net Sales
Net
Sales
Dollars in millions
5
.
5
4
7
1
.
9
9
6
0
.
5
9
6
Net Year-End Debt
Net
Year-End
Debt
Dollars in millions
SG&A (% of net sales)
SG&A
Percent of net sales
4
.
6
7
1
0
.
5
6
1
9
.
9
4
1
%
2
.
5
1
%
1
.
5
1
%
3
.
3
1
our customers.
05
06
07
05
06
07
05
06
07
RECONCILI ATI ON OF INCOM E (LOSS) FROM C ONTIN UING OPERATIONS TO EBITDA AND
T OT AL DEB T TO NET DE BT
This annual report includes EBITDA and Net Debt, which are non-GAAP financial measures as defined by the Securities and Exchange Commission.
EBITDA is calculated in accordance with the definition of the Net Leverage Ratio as set forth in the Company’s $150,000,000 Term Loan Credit Agreement
dated May 22, 2007, and excludes charges for interest, taxes, depreciation and amortization, amortization of deferred financing costs, net earnings of
joint ventures less cash dividends, net earnings of foreign subsidiaries less cash dividends, loss on debt transactions, gains or losses on sale or disposal
of capital assets, non-cash income or expense for the Company’s pension plans, gains or losses from changes in the LIFO reserve, non-cash charges for
the 401(k) company match and up to $2.0 million annually for restructuring, severance and non-recurring charges. Net Debt is calculated as total debt,
outstanding letters of credit and the fair value of the interest rate swap if in a loss position less cash, cash equivalents and restricted cash. EBITDA and
Net Debt are not measures of financial performance under GAAP. EBITDA and Net Debt are not calculated in the same manner by all companies and,
accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for comparing
performance relative to other companies. EBITDA and Net Debt should not be construed as indicators of the Company’s operating performance or
liquidity and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations or cash flow data which are
all prepared in accordance with GAAP. EBITDA and Net Debt are not intended to represent and should not be considered more meaningful than, or as
an alternative to, measures of operating performance as determined in accordance with GAAP. Management believes that presenting this information
is useful to investors because these measures are commonly used as analytical indicators to evaluate performance, measure leverage capacity and debt
service ability and by management to allocate resources. Set forth below are the reconciliations of these non-GAAP financial measures to their most
directly comparable GAAP financial measures.
Reconciliation of income (loss)
from continuing operations to EBITDA
(Dollars in millions)
Income (loss) from continuing operations
Interest
Taxes
Depreciation and amortization
Amortization of deferred financing costs
Net earnings of joint ventures less cash dividends
Net earnings of foreign subsidiaries less cash dividends
Loss on debt transactions
Gains or losses on sale of disposal of capital assets
Non-cash income or expense for pension plans
Gains or loss on change in LIFO reserve
Non-cash charge for 401(k) company match
Restructuring, severance and non-recurring charges
EBITDA
Reconciliation of total debt to Net Debt
(Dollars in millions)
Total debt
Letters of credit and interest rate swaps
Cash and cash equivalents
Restricted cash
Net Debt
2007
$
(7.0)
15.7
.1
20.1
.8
(1.2)
–
12.4
(.4)
6.2
(.9)
2.1
1.0
$ 48.9
2007
$ 149.9
5.9
(12.6)
–
$ 143.2
Years Ended November 30,
2006
$
3.2
20.3
.1
20.2
1.0
(1.8)
(1.5)
–
.2
5.4
(2.2)
2.1
2.0
$ 49.0
Years Ended November 30,
2006
$ 165.0
3.5
(26.4)
(12.3)
$ 129.8
2005
$
(2.7)
21.2
(.3)
21.1
1.4
(.7)
(1.7)
–
2.3
.4
.2
1.4
2.0
$ 44.6
2005
$ 176.4
3.2
(9.9)
–
$ 169.7
Certain information included in this annual report is forward-looking and, accordingly, involves estimates, assumptions, judgments and uncertainties. Forward-looking statements may
generally be identified by the use of forward-looking terms such as “may,” “should,” “projects,” “forecasts,” “seeks,” “believes,” “expects,” “anticipates,” “estimates,” “intends,”
“plans,” “targets,” “likely,” “optimistic,” “will,” “would,” “could,” or similar terms. All forward-looking statements involve risk and uncertainties. For information regarding the risk
factors, see Item 1A Risk Factors in the Business Section of the 10K.
OMNOVA SOLUTIONS INC. 3
Our new product development efforts in Performance
Chemicals will be aided by an important capital investment
we made in late 2007. We expect that our new scale-up
polymerization vessels will reduce the cycle time from product
concept to commercialization and will provide valuable data to
continuously improve our manufacturing processes.
At the same time, capital investments in our Decorative
Products business provide specialized digital printing capability
that will enhance our customer interface. Digital technology
will allow us to get custom wallcovering and laminate design
samples to customers quicker, and enable changes to be made
more easily when finalizing a new concept. We believe this will
not only speed new product and design commercialization but
will also improve the success rate of those products as a result
of more effective customer input early in the process.
On a larger scale, OMNOVA’s digital murals, which can span
as much as 30 feet high by 400 feet long, experienced excellent
growth in 2007, topping $3.0 million in sales. In addition to our
signature viewnique® murals, OMNOVA’s offering has expanded
to several types of print media, not just traditional vinyl.
OMNOVA’s knowledge of decorative, large-format printing
and our turnkey design-through-installation service provides
our customers with the ultimate means of expressing a unique
brand identity in restaurants, retail stores, institutional settings
and countless other commercial applications. Digital murals are
a natural supplement to our traditional wallcovering products.
Another exciting addition to OMNOVA’s wallcovering
offering is ECORE™, a non-vinyl wallcovering that we previewed
during the fall. ECORE has drawn very positive initial reactions
from the marketplace due to its strong performance and design
characteristics and environmental profile. ECORE wallcoverings
are 100% recyclable and use a water-based ink system. While
vinyl remains the product of choice for most commercial
designers, ECORE offers a no-compromise selection for those
seeking alternative materials.
In addition to these new wallcovering products, OMNOVA’s
competency in performance film technology and production
allowed us to enter new market segments that offer additional
growth, including swimming pool liners, banners, awnings
and proprietary products for health care. These are excellent
opportunities to further leverage our core capabilities.
Globalization
The rapidly growing markets in Asia have been well-
documented, and we are certainly seeing this same growth
trend for our products. While the Company has participated in
the Asian markets for the last several years, with the Chinese
4
OMNOVA SOLUTIONS INC.
Enhanced Product Development. New scale-up polymerization
vessels (center) provide an important link in the development of
new chemical products, between early lab evaluations (upper left)
and full-scale production at one of OMNOVA’s five chemical
facilities (lower right). Markets that will benefit from this new
capability include (bottom, left to right) paper, floor care, tape,
nonwovens, oil and gas drilling, and construction.
OMNOVA SOLUTIONS INC. 5
economy growing at about 10% annually, as well as significant
benefits in our initiatives to further develop our global supply
growth in the Asia-Pacific region as a whole, we are taking action
chain capability to allow us to more effectively deal with raw
to more broadly share in this exciting explosion of opportunity.
material cost issues in Asia and North America.
Certainly, the recent announcement that OMNOVA has
At the same time, performance of our wallcovering and
purchased our partner’s shares in the Asian Decorative Products
fabrics business based in the United Kingdom was much
businesses in China and Thailand is part of that strategy. This
improved in 2007. Sales of our decorative products in Europe,
enables OMNOVA to become a true global supplier, which
which had been in decline in recent years, accomplished a major
provides a unique competitive advantage to grow in Asia and
turnaround in 2007, as this portion of our business recorded its
leverage our North American market leadership position. We
first operating profit since 2003. This was achieved despite slow
will be able to optimize capacity across all of our worldwide
European commercial markets overall.
manufacturing operations and provide customers with con-
Likewise, our Performance Chemicals business continues
sistent product performance and supply through one global
to expand its global presence as total international sales
point of contact. We expect that this will also provide additional
increased 7% year-over-year. We have a strong technical
6
OMNOVA SOLUTIONS INC.
New Products and Related Markets. Among new products,
OMNOVA’s ECORE™ non-vinyl wallcovering (far left) features
a strong environmental profile and expands the choices for
commercial interior designers.
To speed the commercialization
of new designs, OMNOVA is leveraging digital printing technol-
ogy for wallcovering and laminate product sampling (top, center).
Large-scale viewnique® digital wall murals (top, far left) help
create a unique brand identity in restaurant, retail, institutional
and hospitality environments.
OMNOVA is also serving an
array of new, related markets. Examples in the performance
films product line (upper right) include swimming pool liners
and awnings.
service and alliance manufacturing capability in Europe. In Asia,
yielded $8.2 million in cost savings year-over-year. With our
we established a sales and technical service organization in
growth and the lower costs, we are getting greater operating
Shanghai in 2005, where we have focused on delivery of our
leverage. SG&A costs were 13.3% of sales in 2007, compared
World Class tape release and saturant products, in addition to
with 15.1% in 2006 and 20.0% in 2004. This was the lowest SG&A
chemicals used in nonwovens, textiles and tire cord adhesives.
since the spin-off of OMNOVA Solutions in 1999.
DISCIPLINE
A disciplined focus on executing on the basics has
been critical to our progress over the last few years. Lowering
our overall cost base has been an important part of this focus.
Our associates around the Company are engaged in our
ongoing goal to eliminate waste, and in so doing, create greater
opportunities for growth. Actions by both business units in 2007
Additionally, we continued to drive down manufacturing
conversion costs in 2007 as Performance Chemicals led the
way with increased productivity, highlighting our best-ever
performance in pounds produced per employee. Performance
Chemicals delivered its best inventory turnover and Decorative
Products also did well, with a 25% improvement over the last
two years.
OMNOVA SOLUTIONS INC. 7
In June, the Company took a major step to improve our
in-house group of employees. This not only lowers our costs
capital structure. We elected to call our $165 million of 11.25%
but will enhance our ability to operate effectively and identify
high-yield bonds and refinance our debt at more favorable
further improvements long after the consultants are gone and
interest rates and with fewer covenant restrictions. This reduces
the initial project is complete.
OMNOVA’s operating costs, increases our flexibility to pursue
As we continue to enhance our capabilities in many
strategic initiatives and lowers our risk. Our weighted average
areas, we are increasingly focused on our role in improving the
cost of debt as of November 30, 2007, was 7.5%, versus 10.8%
environment and environmental sustainability, which is one of
in 2006. The reduced debt and lower interest rates delivered
our core values. We have introduced many environmentally
$3.2 million in interest savings in 2007, with an expected full-
preferred products across a number of markets. We have made
year impact of about $6.0 million based on interest rates at the
sound investments to reduce our energy consumption in our
time of the refinancing.
facilities and achieve the corresponding environmental benefits.
Our focus on strong cash management continued and was
Also, we have consistently expanded our focus on recycling
a key enabler to our refinancing. Total debt was $149.9 million
and on improving the quality of water and air emissions at
as of November 30, 2007, down $15.1 million from the prior year.
our factories.
OPPORT UN IT IE S
While we have made consistent progress in the face of
extremely challenging operating conditions, we certainly have
higher aspirations and are not satisfied with where we are today.
We are committed to continuing to drive for improvements in
profitability and shareholder returns.
As we enter 2008, the operating environment remains
challenging. However, we are better positioned than at any
time in our history to succeed despite these uncertain times.
We have solid sales momentum driven by a growing list of new
products and an expanding combination of served markets. Our
cost base is the lowest it has been in our history. Our balance
sheet is greatly improved. Our ability to grow globally has been
significantly enhanced. Together, these provide OMNOVA
Solutions with long-term opportunities for growth.
Most important, our associates are rising to the challenge
every day. It is their capabilities, teamwork and dedication that
make this possible. My thanks to all of them for their unyielding
efforts. All of our associates, along with our independent Board
of Directors, are united in their commitment and focus on
continuing to improve our performance and generating greater
returns for our shareholders.
Thank you for your continued support.
Kevin M. McMullen
Chairman and CEO
At year-end, availability under our credit facility grew to nearly
$74 million and our leverage ratio of Net Debt to EBITDA stood
at 2.9. (Definitions of EBITDA and Net Debt, plus reconciliations
of EBITDA to income or loss from continuing operations and
Net Debt to total debt are provided on page 3 of this report.)
Our LEAN SixSigma operating approach has been at the
center of many of our improvements in working capital, cash
flow and cost. In 2007, we celebrated our fourth full year of
implementation of this disciplined approach to eliminating
waste and streamlining operations, and it has truly become the
way we do business. Since its inception at OMNOVA, LEAN
SixSigma has delivered significant bottom-line impact in the
form of cash flow or operating profit improvements. It is hard
to imagine where OMNOVA would be today without LEAN
SixSigma, given the steep inflation in raw material and freight
costs we have experienced. We are excited that a growing
legion of customers and suppliers have joined our associates in
LEAN SixSigma training and projects.
Our new SAP business system is also having a positive
impact. SAP is fully implemented in Performance Chemicals,
achieving approximately $1.5 million in savings in 2007 in
addition to providing better, faster data for making critical
business decisions. Our plan continues to focus on moving
our Company to one common operating platform from many
disparate home-grown systems. As part of that plan, we are
now moving on to the implementation of SAP in our Decorative
Products business. The first phase successfully went live at the
beginning of the 2008 fiscal year.
Implementation will continue during 2008, and we expect
it to be complete at all domestic facilities by early 2009. We
continue to reach our milestones in a timely fashion and at
lower costs than other companies we benchmark. One of the
reasons is that the effort is being led primarily by a dedicated,
8
OMNOVA SOLUTIONS INC.
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended November 30, 2007
Commission File Number 1-15147
OMNOVA Solutions Inc.
(Exact name of registrant as specified in its charter)
Ohio
(State of Incorporation)
175 Ghent Road, Fairlawn, Ohio
(Address of principal executive offices)
34-1897652
(I.R.S. Employer Identification No.)
44333-3300
(Zip Code)
Registrant’s telephone number, including area code (330) 869-4200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
Common Stock, par value 10¢ per share
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 (cid:59) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes (cid:59) No (cid:133)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:59)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes (cid:133) No (cid:59)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes (cid:59) No (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act). Yes (cid:133) No (cid:59)
The aggregate market value of the voting stock held by nonaffiliates of the registrant was $234,409,151, based on the closing price per share of $5.61 on May 31, 2007, the last
business day of the registrant’s most recently completed second quarter.
As of January 15, 2008, there were 42,618,701 outstanding shares of the Company’s Common Stock, 10¢ par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2008 Proxy Statement of OMNOVA Solutions Inc. are incorporated into Part III of this Report.
Table of Contents
OMNOVA Solutions Inc.
Annual Report on Form 10-K
For the Year Ended November 30, 2007
Table of Contents
Item
Number
PART I
1
1A
1B
2
3
4
4A
PART II
5
6
7
7A
8
9
9A
9B
PART III
10
11
12
13
14
PART IV
15
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Signatures
1
8
12
13
13
14
14
15
16
17
30
32
64
64
64
64
64
64
65
65
65
68
Table of Contents
Item 1.
Business
Introduction
PART I
OMNOVA Solutions Inc. (referred to in this report as OMNOVA Solutions, OMNOVA, the Company, we or our) became an independent publicly-traded company on October 1, 1999,
when GenCorp Inc., our former parent company, distributed a dividend of one share of OMNOVA Solutions common stock for each share of GenCorp common stock held on the
September 27, 1999 record date (the spin-off). OMNOVA Solutions is incorporated under the laws of the State of Ohio, and its headquarters is located at 175 Ghent Road, Fairlawn, Ohio
44333.
OMNOVA Solutions is an innovator of emulsion polymers, specialty chemicals and decorative and functional 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. OMNOVA’s
leading positions have been built through innovative new products, customized product solutions, strong brands, strong technical expertise, well-established distribution channels and long-
standing customer relationships. We have about 1,500 customers who rely on over 1,000 OMNOVA products to differentiate themselves in the marketplace. We utilize 17 strategically
located manufacturing, development and design facilities in North America, Europe and Asia to service our broad customer base.
OMNOVA operates in two business segments: Performance Chemicals and Decorative Products. Of our 2007 net sales, 64% were derived from the Performance Chemicals
segment and 36% were derived from the Decorative Products segment. Financial information relating to the Company’s business segments is set forth in Note P to the Consolidated
Financial Statements of this report.
On September 27, 2006, we sold substantially all of the assets and liabilities of the Building Products business to BFS Diversified Products, LLC. This divestiture focuses our
resources in strategic product lines where we enjoy leading market positions. The results of operations of the Building Products business for the prior periods have been reported as
discontinued operations. Financial information relating to discontinued operations is set forth in Note D to the Consolidated Financial Statements of this report.
Performance Chemicals
Background
Our Performance Chemicals segment began in 1952 as a segment of GenCorp (then known as The General Tire & Rubber Company). Initially, the business focused on the
manufacture of styrene butadiene latex (or SB latex), an emulsion polymer, for the paper industry and SB vinyl pyridine latex for tire cord adhesives in its Mogadore, Ohio facility. During the
1960s, the business began expanding its product lines for the paper and carpet and other industries, and in 1993 started a SB latex plant in Green Bay, Wisconsin to better serve the needs
of its paper customers in the upper midwest. In 1996, SB latex capacity at the Mogadore, Ohio facility was substantially expanded.
Performance Chemicals broadened its styrene butadiene offerings with the acquisition of Goodyear’s Calhoun, Georgia SB latex business in 1998, providing additional manufacturing
capacity, a strong presence in the southeast and an expanded customer base. In 1998, Performance Chemicals also acquired Sequa Chemicals’ U.S. specialty chemicals business, which
added acrylic, vinyl acrylic and vinyl acetate latex products, expanded market positions and provided entry into new specialty chemical markets.
The fiscal year 1999 acquisition of PolymerLatex’s U.S. acrylics latex business in Fitchburg, Massachusetts provided a key northeast production location while strengthening and
diversifying served markets in specialty acrylic emulsions. The acquisition of Morton International’s global floor care polymer business in 1999 added several new emulsion polymer product
lines and customers, based on complementary manufacturing technology and drove the establishment of Performance Chemical’s European headquarters in Hemel Hempstead, UK.
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On May 1, 2002, OMNOVA Solutions and the Rohm and Haas Company formed RohmNova LLC, an alliance for the purpose of marketing, selling and servicing latex binders,
synthetic pigments and specialty chemical additives for coatings in the paper and paperboard industry. The alliance has reduced our costs while providing total solutions capability to
customers and offers a strong portfolio of complementary coating products for the paper and paperboard industry. In addition, the alliance facilitates joint technology development,
leveraging highly complementary technology from the two parent companies.
In 2005 the Company established a legal entity in China, OMNOVA Performance Chemicals Trading (Shanghai) Co., LTD. and opened a commercial and technical sales office in
Shanghai, China.
Products
OMNOVA Solutions’ Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene (SB), styrene
butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal and fluorochemical chemistries. We are North America’s
second largest producer of SB latex and operate well maintained, strategically located, cost competitive production facilities. Our custom-formulated products are tailored for coatings,
binders and adhesives, which are used in paper, carpet, nonwovens, construction, adhesives, paper tape, tire cord, floor polish, textiles, graphic arts, plastic parts and various other
specialty applications. Our products provide a variety of functional properties to enhance our customers’ products, including greater strength, adhesion, dimensional stability, water
resistance, flow and leveling, improved processibility and enhanced appearance. Our Performance Chemicals segment is recognized for its core capabilities in emulsion polymerization and
emulsion polymer technology and for its ability to rapidly develop and deliver highly-customized products that provide innovative and cost-effective solutions to customers.
The following table shows the major products that our Performance Chemicals segment produces and markets.
Product Category
% of Performance
Chemicals Fiscal
2007 Net Sales
Paper and Carpet Chemicals
65.0%
Specialty Chemicals
35.0%
Primary Products
End-use Applications
Brand Names
SB and SBA latex coating binders,
carpet backing binders and paper
chemicals including crosslinkers,
lubricants and other coating
additives
Magazines, catalogs, direct mail
advertising, brochures and printed
reports, food cartons, household
and other consumer and industrial
packaging, and residential and
commercial carpet
GENCAL, GENFLO, GENCRYL,
GENCRYL PT, SEQUAFLOW,
REACTOPAQUE, SUNKOTE,
SUNBOND, SUNKEM, UNIQ-
PRINT, SEQUABOND, SUNREZ,
SEQUAREZ, OMNABLOC,
OMNATUF
SB, SBA, styrene butadiene vinyl
pyridine, acrylic, vinyl acrylic,
styrene acrylic, and polyvinyl
acetate emulsion polymers, glyoxal
resins, silicone emulsions,
polyethylene resins,
fluorochemicals and
fluorosurfactants
Nonwovens (such as diaper
components, engine filters, resilient
flooring underlay, roofing mat, shoe
components and household scrub
pads), construction, adhesives,
masking tapes, tire cord, floor
polish, textiles, graphic arts and
plastic part coatings
GENFLO, GENCRYL, GENTAC,
OMNAGLO,
SEQUABOND, SUNCRYL,
SECOAT, SECRYL, MOR-GLO,
MOR-SHINE, MOR-FLO,
ACRYGEN, MYKON,
PERMAFRESH, SEQUAPEL,
POLYFOX, X-CAPE,
GENGLAZE, MYKOSOFT,
MYKOSIL, NOVANE, GENCEAL
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Paper and Carpet Chemicals. OMNOVA is a leading North American supplier of custom-formulated SB and SBA latex for paper and paperboard coatings. In addition, we produce a
broad variety of specialty chemical additives for coating applications in the paper industry. Our commitment to product innovation has enhanced our market position by creating products for
the paper industry that improve the strength, gloss, opacity, moisture resistance and printability of coated papers and paperboard. Applications for our products include paper and
paperboard coatings used in magazines, catalogs, direct mail advertising, brochures and printed reports, food cartons, household and other consumer and industrial packaging.
OMNOVA is also a leading North American supplier of custom-formulated SB latex used as carpet backing binders. Our products for the carpet industry secure carpet fibers to the
carpet backing and adhere the primary backing to the secondary backing and meet the stringent manufacturing, environmental, odor, flammability and flexible installation requirements of
our customers. Our strong historic 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 properties, enabling the replacement of higher-cost polyurethane binders. Sales of our Paper and Carpet Chemicals products represented 41.4% of our
consolidated net sales for 2007, 41.6% of our consolidated net sales for 2006 and 42.9% of our consolidated net sales for 2005.
Specialty Chemicals. OMNOVA is a leading North American supplier of specialty polymers and chemicals for a variety of niche product categories. Applications for our specialty
polymers and chemicals include nonwovens (such as diaper and hygiene components, engine filters, resilient flooring underlay, roofing mat, shoe components and household scrub pads),
floor polish, paper tape, adhesives, tire cord, textiles, construction, plastic part coatings and ink coating additives. Our focus is on developing unique products and custom applications that
address specific customer needs, including enhanced functionality, improved environmental performance and lower cost through improved processibility and product substitution for higher-
cost materials.
The Performance Chemicals segment continued its market development program for the proprietary PolyFox fluorosurfactant platform during 2007. In addition to its use as a flow and
leveling additive in a wide variety of coatings, electronics and other applications, a new development initiative for use as a reactive intermediate was launched in 2007. Sales of our
Specialty Chemicals products represented 22.3% of our consolidated net sales for 2007, 21.6% of our consolidated net sales for 2006 and 22.3% of our consolidated net sales for 2005.
Markets and Customers
The paper coating and carpet backing latex product lines are highly competitive based on price, quality, customer service, product performance, field technical support and product
innovations. Major paper and carpet customers include New Page, Verso Paper Company, Shaw Industries, Stora Enso Corporation and Beaulieu. The specialties product line includes
many product categories such as tire cord adhesives, components for diaper and hygiene products and roofing mat that are performance driven where product innovation, technical service
and application support are key competitive differentiators. Major specialty chemical customers include Bridgestone Firestone, Freudenburg Nonwovens, Polymer Group Inc. and Ahlstrom.
Marketing and Distribution
Our Performance Chemicals segment primarily sells its products directly to manufacturers through dedicated internal marketing, sales and technical service teams focused on
providing highly responsive customized solutions to targeted markets and industries.
Competition
Performance Chemicals competes with several large chemical companies including Dow and BASF, some of which are vertically integrated in one or more major raw materials.
Performance Chemicals also competes with a variety of other suppliers of specialty chemicals including The Lubrizol Corporation, Rohm and Haas Company, Air Products and Chemicals,
Inc. and Celanese Corporation. Depending on the products involved and markets served, the basis of competition varies
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and may include price, quality, customer and technical service, product performance and innovation and industry reputation. Overall, our Performance Chemicals segment regards its
products to be competitive in its major categories and we believe that we are a leader in several North American categories, including SB and SBA latex paper coatings and carpet backing
binders, nonwoven SB binders and SB vinyl pyridine tire cord adhesives.
Decorative Products
Background
Our Decorative Products segment began in 1945 when GenCorp (then known as The General Tire & Rubber Company) purchased the Jeannette, Pennsylvania coated fabrics facility
from the Pennsylvania Rubber Company. In 1963, a production facility was built in Columbus, Mississippi to increase General Tire’s capacity and product offerings in coated fabrics. The
manufacturing of commercial wallcovering was added at that plant in the early 1970s.
Decorative Products expanded its commercial wallcovering capabilities in 1991 through the acquisition of Canadian General Towers’ commercial wallcovering business. With the
1998 acquisition of Walker Greenbank’s U.K.-based Muraspec commercial wallcovering business, Decorative Products grew its leadership position in this product category. Muraspec
provides a European manufacturing base and a distribution business with sales offices throughout the U.K. and Europe. Muraspec also serves as a key European distribution platform for
marketing coated fabrics and other surfacing products.
The Reneer Films Division of Goodyear was acquired in 1993, increasing vinyl film and laminate capability for the Decorative Products business. In 1997, the Printworld business of
Technographics, Inc. was acquired, adding paper laminates to our vinyl laminate portfolio.
In 2001, OMNOVA Solutions acquired certain business lines and assets of Decorative Surfaces International, Inc. (DSI), including its commercial wallcovering, laminates and coated
fabrics product lines.
We have also pursued global growth initiatives by entering into joint ventures. In 1999, Decorative Products formed a joint venture company with an affiliate of the Thailand-based
Charoen Pokphand Group. The joint venture acquired a Rayong, Thailand-based decorative film and coated fabrics business to serve the decorative film and coated fabric product-based
markets in the Asia-Pacific region and provide expanded product lines to North America and Europe. In 2000, we formed another joint venture with the Charoen Pokphand Group, which
acquired a Shanghai, China-based coated fabrics business to further strengthen and expand our position in China and the Asia-Pacific region and provide expanded product lines to North
America and Europe. During the first quarter of 2008, we acquired the remaining equity interests in these joint ventures. As a result, both the Thailand and China businesses will be
reflected as wholly-owned subsidiaries in 2008.
In 2006, we acquired certain manufacturing assets of American Decorative Surfaces Incorporated (the successor company to DSI), providing us with new extrusion capability that
broadens the product offerings in our laminates business.
Products
Our Decorative Products segment develops, designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated
and performance fabrics, vinyl, paper and specialty laminates and industrial films. These products are used in numerous applications, including commercial building refurbishment,
remodeling and new construction; residential cabinets, flooring and furnishings; transportation markets including school busses, marine and automotive; recreational vehicles,
manufactured housing and a variety of industrial film applications. Our core competencies in design, coating, compounding, calendering, printing and embossing enable us to develop
unique, aesthetically pleasing decorative surfaces that have functional properties, such as durability and scratch and stain resistance, that address specific customer needs. We have
strong internal and external resources in design capabilities, an extensive design library covering a broad range of styles, patterns, textures and colors and strong coating and processing
capabilities to provide our products with functionality that adds value for our customers. Our broad range of products and end-use applications give us economies of scale in sourcing,
manufacturing, design, sales and marketing, technology and process development.
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The following table shows the products that our Decorative Products segment develops, designs, produces and markets.
Product Category
Contract Interiors
% of Decorative
Products Fiscal
2007 Net Sales
45.3%
Coated Fabrics
28.8%
Vinyl and urethane coated fabrics,
industrial films
Laminates
25.9%
Vinyl, paper and specialty
laminates
Primary Products
End-use Applications
Brand Names
Vinyl and nanofiber based
wallcoverings, dry erasable
surfaces, customized wall murals,
vinyl and urethane coated fabrics
BOLTA, ESSEX, GENON,
TOWER, MURASPEC, MUREK,
MEMERASE II, VIEWNIQUE,
DIVERSIWALL, ECORE
BOLTAFLEX, BOLTASOFT,
NAUTOLEX, PREFIXX,
PREVAILL, ENDURION
PREEMPT, RADIANCE,
SURF(X) 3D, DESIGN4
Decorative and protective wall and
seating surfacing for offices, hotels,
hospital and medical offices,
stores, schools, restaurants and
public buildings
Decorative and protective surfacing
for transportation and marine
seating, pool liners, automotive soft
top covers, banners, tents, ceiling
tiles, commercial and residential
furniture
Decorative and protective surfacing
for kitchen and bath cabinets,
manufactured housing and
recreational vehicle interiors,
flooring, commercial and residential
furniture, retail display, home
furnishings and consumer
electronics
Contract Interiors. OMNOVA Solutions is a leading North American and European supplier of wallcoverings and coated fabrics used in commercial applications. Our commercial
wallcoverings are recognized for their leading designs as well as their strength, durability and cleanability. Our vinyl wallcoverings, in addition to their aesthetic appeal, reduce repair and
maintenance costs for building owners by protecting wall surfaces and having longer useful lives as compared to paint and paper wallcoverings. Applications for our commercial
wallcoverings include refurbishment and new construction for the commercial office, hospitality, health care, retail, education and restaurant markets.
OMNOVA’s commercial wallcovering product lines include a broad range of fabric-backed vinyl, paper-backed vinyl and nanofiber based wallcoverings. Our industry leading styling
and design library covers a broad range of styles, patterns, textures and colors, both traditional and contemporary. In addition to strong internal and external resources in design
capabilities, strengths include a reputation for product durability and quality, a global distribution network, an extensive emboss and print roll library, strong brands, custom design and
manufacturing capability and long-term customer relationships. Contract Interiors represented 16.4% of our consolidated net sales for 2007, 16.3% of our consolidated net sales for 2006
and 13.5% of our consolidated net sales for 2005.
Coated Fabrics. OMNOVA Solutions is a leading North American supplier of vinyl and urethane coated fabrics for commercial and residential 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.
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Applications for our coated fabrics include:
•
•
•
transportation seating (OEM school bus and marine), automotive soft tops and aftermarket automotive and marine applications;
industrial films (banners, tents, health care and construction);
interior structures (ceiling tiles).
Sales of our coated fabrics products represented 10.4% of our consolidated net sales for 2007, 10.4% of our consolidated net sales for 2006 and 12.8% of our consolidated net sales
for 2005.
Laminates. OMNOVA Solutions is a leading North American supplier of calendered and extruded vinyl and paper laminates. Our laminates are used as alternatives to wood, paint
and high-pressure laminates in markets where durability, design and cost are key requirements. We provide our customers with 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, home furnishings, and consumer electronics.
A key strength of our laminates business is our coating technology, including ultraviolet, melamine, urethane, thermal cured and others, which provides durable finishes for high-wear
applications. In addition, our laminates business has further differentiated itself in the market as a single-source supplier of integrated vinyl and paper laminate designs for the furniture and
cabinet industries, by building a unique library of matched vinyl and paper laminate designs with an extensive library of patterns and textures and developing rapid make-to-order
production capabilities. We also offer SURF(X) 3D Laminates for multi-dimensional applications for the office furniture and retail display fixture markets. These laminates offer a cost-
effective alternative to high pressure laminates and provide furniture makers with design flexibility in rounded surfaces, eliminating the need for unsightly and expensive edge-banding.
Sales of our laminates products represented 9.4% of our consolidated net sales for 2007, 10.2% of our consolidated net sales for 2006 and 8.5% of our consolidated net sales for 2005.
Markets and Customers
We believe that our Decorative Products segment is a leader in its targeted product categories. The contract interiors, coated fabrics and laminates businesses are highly competitive
based on decorative content, functional performance, price, quality, customer service, brand name recognition, distribution networks and reputation. Decorative Products markets its
products under numerous brand names to different industries. Certain of our better-known customers of this segment include Steelcase, Armstrong, Stingray Boats, Ashley Furniture,
Patrick Industries, Herculite and Merillat.
Marketing and Distribution
Our Decorative Products segment distributes its products through a variety of channels. Contract Interiors’ wallcovering products are marketed primarily through independent
distributors to building owners, contractors, architects, interior designers and other specifiers. Several of our distributors are national in scope, providing us with the capability to cost-
effectively market products to both regional and national commercial purchasers. Coated fabrics and laminates are sold directly and through agents to manufacturers of cabinets, furniture,
seating and other products. Many of our Decorative Products segment’s products have strong, well-recognized brand names that are promoted through trade shows, industry periodicals
and our website (www.omnova.com) and other media.
Competition
OMNOVA’s Decorative Products segment competes with numerous companies, many of which focus on one product line and/or market and are smaller and privately-owned. Key
competitors include:
•
•
•
Contract Interiors—RJF International Corporation, US Vinyl, J. Josephson Inc., and Paint Systems
Coated Fabrics—Morbern Inc., China General, Uniroyal, Spradling International Inc. and G&T Industries
Laminates—Chiyoda Gravure Corporation, Dai Nippon Printing Co., Ltd., Toppan Printing Co., Ltd., American Renolit Corporation, LG ChemAmerica, Riken USA
Corporation and Spartech Industries
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International Operations
Net sales from our foreign operations were $79.9 million in 2007, $65.8 million in 2006 and $66.4 million in 2005. These net sales represented 10.7% of our total net sales in 2007,
9.4% of our total net sales in 2006 and 9.6% of our total net sales in 2005. Long-lived assets primarily consist of net property, plant and equipment and net intangibles. Long-lived assets of
our foreign operations totaled $17.5 million at November 30, 2007 and $17.5 million at November 30, 2006. Our consolidated long-lived assets totaled $140.0 million at November 30, 2007
and $144.2 million at November 30, 2006.
Additionally, the Company holds a 50.1% interest in each of its three Asian joint ventures: CPPC-Decorative Products Co., Ltd. located in Thailand and CG-OMNOVA Decorative
Products (Shanghai) Co. Ltd. and Beston OMNOVA Plastics (Taicang) Co., Ltd., both located in China. The Company accounts for these investments using the equity method of
accounting due to contractual limitations that grants substantive participating rights to the minority partner. The unconsolidated net sales for CPPC-Decorative Products Co., Ltd. were
$47.1 million, $45.1 million and $42.5 million in 2007, 2006 and 2005, respectively. The unconsolidated net sales for CG-OMNOVA Decorative Products (Shanghai) Co., Ltd. were $56.3
million, $47.4 million and $38.1 million in 2007, 2006 and 2005, respectively. The unconsolidated net sales for Beston OMNOVA Plastics (Taicang) Co., Ltd. were $0.5 million in 2007.
Beston OMNOVA Plastics (Taicang) Co., Ltd. was formed in April 2007 with operations commencing in June 2007. During the first quarter of 2008, the Company acquired the remaining
equity interests in these joint ventures. As a result, these entities will be reflected as wholly-owned subsidiaries in 2008.
Intellectual Property
We regard patents, trademarks, copyrights and other intellectual property as important to our success, and we rely on them in the United States and foreign countries to protect our
investments in products and technology. Patents to which we have rights expire at various times, but we believe that the loss or expiration of any individual patent would not materially
affect our business. We, like any other company, may be subject to claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties from time
to time in the ordinary course of business.
Seasonal Factors
We historically experience stronger sales and income in our second, third and fourth quarters, comprised of the three-month periods ending May 31, August 31 and November 30.
Our performance in the first quarter (December through February) has historically been weaker due to generally lower levels of customer manufacturing, construction and refurbishment
activities during the holidays and cold weather months.
Environmental Matters
Our business operations, like those of other companies in the industries in which we operate, are subject to numerous federal, state, local and foreign environmental laws and
regulations. These laws and regulations not only affect our current operations, but also could impose liability on us for past operations that were conducted in compliance with then
applicable laws and regulations. For further discussion of capital and noncapital expenditures incurred in 2007 and forecasted for 2008 for environmental compliance, please refer to
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” on page 29 of this report, which is incorporated herein by reference.
Employees
We employed approximately 1,640 employees at November 30, 2007 at offices, plants and other facilities located principally throughout the United States and the United Kingdom.
Approximately 28% or about 460 of our employees are covered by collective bargaining agreements. Approximately 115 employees are covered by collective bargaining agreements due to
expire in 2008.
Raw Materials
Our Performance Chemicals segment utilizes a variety of raw materials, primarily monomers, in the manufacture of our products, all of which are generally available from multiple
suppliers. Monomer costs are a major component of the
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emulsion polymers produced by this segment. Key monomers include styrene, butadiene, acrylates and vinyl acetate. These monomers represented approximately 73% of our total raw
materials purchased on a dollar basis in 2007 for this segment.
Our Decorative Products segment utilizes a variety of raw materials that are generally available from multiple suppliers. Key raw materials include polyvinyl chloride (PVC) resins,
textiles, plasticizers, paper and titanium dioxide. PVC resins and textiles represented approximately 51% of our total raw materials purchased on a dollar basis in 2007 for this segment.
The cost of these raw materials has a significant impact on our profitability. We generally attempt to respond to raw material cost increases through productivity programs and, as
needed, price increases to our customers. The success of attempted price increases depends on a variety of factors including the specific market application and competitive environment.
Under certain circumstances, we are not able to pass along the increase. In addition, if accepted by customers, price increases generally lag the increase in raw material costs.
Research and Development
The OMNOVA Solutions technology centers in Akron, Ohio and Chester, South Carolina support research and development efforts across our businesses and complement the
resources focused on innovation in each of our segments. Our efforts are focused on developing new applications with our base technology, enhancing the functionality of our products in
existing applications as well as developing new product and technology platforms.
Our research and development expenses were $9.1 million in 2007, $9.5 million in 2006 and $11.2 million in 2005. Research and development expenses include the costs of
technical activities that are useful in developing new products, services, processes or techniques, as well as those expenses for technical activities that may significantly improve existing
products or processes. Information relating to research and development expense is set forth in Note A to the Consolidated Financial Statements of this report.
Available Information
Our website is located at www.omnova.com. We make available free of charge on our website all materials that we file electronically with the Securities and Exchange Commission,
including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we
electronically file or furnish such materials to the SEC. The OMNOVA Solutions Business Conduct Policies and Corporate Governance Guidelines and charters for the Audit Committee and
Compensation and Corporate Governance Committee of the OMNOVA Solutions Board of Directors are also available on our website and in print to any shareholder who requests a copy.
All requests must be made in writing, addressed to OMNOVA Solutions Inc., Attn: Secretary, 175 Ghent Road, Fairlawn, Ohio 44333-3300.
Item 1A.
Risk Factors
This Annual Report includes “forward-looking statements,” as defined by federal securities laws. Forward-looking statements may address a number of matters including the
Company’s business, markets in which the Company operates, results of operations, financial condition, significant accounting policies and management judgments, and include
statements based on current beliefs, assumptions, expectations, estimates, forecasts and projections about these items and other matters. Words such as, but not limited to, “may,”
“should,” “projects,” “forecasts,” “seeks,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “optimistic,” “likely,” “will,” “would,” “could,” and similar expressions or
phrases identify forward-looking statements.
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. Other
risks and uncertainties are more specific to the Company’s operations. These risks and uncertainties and the achievement of expected results depends on many factors, some or all of
which are not predictable or within the Company’s control. Certain risk factors facing the Company are described below or elsewhere in this Form 10-K. Risk factors could adversely affect
our results and, in some cases, such effect could be material.
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All written and verbal forward-looking statements attributable to the Company or any person acting on the Company’s behalf are expressly qualified in their entirety by the risk factors
and cautionary statements contained herein. Any forward-looking statement speaks only as of the date on which such 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 forward-looking statements whether as a result of new information, future events or
otherwise.
We are exposed to general economic, business and industry conditions. A significant or prolonged downturn could adversely affect demand for our products.
We are subject to general economic, business and industry conditions. A significant or prolonged economic downturn could have the potential to adversely affect the demand for our
products and our results.
Raw material prices and availability have a significant impact on our profitability. If raw material prices increase, and we cannot pass those price increases on to our
customers, or we cannot obtain raw materials in a timely manner, our results could be adversely affected.
The principal raw materials that we use in our business are derived from petrochemicals and chemical feedstocks such as styrene, butadiene and polyvinyl chloride. Specifically,
Performance Chemicals uses monomers such as styrene and butadiene extensively in its products, and Decorative Products uses polyvinyl chloride extensively in its products. If we are
unable to pass along increased raw materials prices to our customers, our results could be adversely affected. The cost of these raw materials has a significant impact on our profitability.
The prices of many of these raw materials are cyclical and volatile. Supply and demand factors, which are beyond our control, generally affect the price of our raw materials. While we
generally attempt to pass along increased raw materials prices onto our customers in the form of price increases, historically there has been a time delay between increased raw materials
prices and our ability to increase the prices of our products. Additionally, we may not be able to increase the prices of our products due to pricing pressure and other factors.
We generally have multiple sources of supply for our raw materials. However, a limited number of suppliers are capable of delivering certain raw materials that meet our standards.
Various factors could reduce the availability of raw materials. Shortages could occur in the future. Additionally, disruptions in transportation could delay receipt of raw materials. If our
supply of raw materials is disrupted or our lead times extended, our results could be adversely affected.
Consolidation of our customers and competitors has created increased pricing pressure. If we are required to reduce our price to remain competitive, this could adversely
affect our results.
We face continued pricing pressure from our customers and competitors. Customers frequently seek price reductions and customer consolidation in certain markets has created
customers with greater purchasing power. Additionally, consolidation among our competitors has created competitors with greater financial and other resources. If we are required to
reduce prices to compete and we cannot improve operating efficiencies and reduce expenditures to offset such price decrease, our results could be adversely affected.
Our sales and profitability depend on our ability to continue to develop new products that appeal to customers. If we are unable to develop new products, our results could be
adversely affected.
Our business depends to a substantial extent on our ability to develop, introduce and support cost-effective new products and technologies on a timely basis. If we fail to develop and
deploy new cost-effective products and technologies on a timely basis, our products may no longer be competitive and our results could be adversely affected.
A significant portion of Performance Chemicals sales is concentrated among several large customers.
Our Performance Chemicals segment has several large customers who account for a significant portion of Performance Chemicals’ total sales. The loss of, or a significant reduction
in purchases by, one of these large customers could adversely affect our results.
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Our customers may not be able to compete against increased foreign competition which could adversely affect the demand for our products and our results.
Our domestic customers are subject to increasing foreign competition. If the demand for domestically manufactured products declines then the demand for our domestically
manufactured products could decline adversely affecting our results.
Our business is subject to the risks associated with the use of chemicals.
We are subject to risks associated with chemical use including explosions, fires, leaks, discharges, inclement weather, natural disasters, mechanical failure, unscheduled downtime,
transportation interruption and acts of God. The occurrence of these risks may result in operating disruptions at our facilities and could adversely affect our results.
We may be unable to achieve, or may be delayed in achieving, our goals under certain cost-reduction measures, which could adversely affect our results.
We have and are undertaking operational excellence processes using LEAN Six Sigma quality, supply chain management, ERP and other initiatives in an effort to improve
efficiencies and lower our cost structure. If we are unable to achieve, or if we meet any unexpected delays in achieving our goals, our results could be adversely affected. Additionally, even
if we achieve these goals, we may not receive the expected financial benefits of these goals, or the costs of implementing these initiatives could exceed the benefits of these initiatives.
From time to time, we participate in joint ventures that may not operate according to their business plans if our partners fail to fulfill their obligations. This could adversely
affect our results and require us to dedicate additional resources to these joint ventures.
From time to time, we participate in joint ventures. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their
obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our results could be adversely affected or we may be required to increase our
level of commitment to the joint venture. Also, differences in views among joint venture participants could result in delayed decisions or failures to agree on major issues. If these
differences cause the joint ventures to deviate from their business plans, our results could be adversely affected.
We may not be able to identify or complete transactions with attractive acquisition candidates, which could adversely affect our business strategy.
As part of our business strategy, we have pursued, and may continue to pursue, targeted acquisition opportunities that we believe would complement our business. We may not be
successful in consummating any acquisition, which could adversely affect our business strategy.
The occurrence or threat of extraordinary events, including natural disasters, political disruptions, domestic and international terrorist attacks and acts of war, could
significantly decrease demand for our products.
Extraordinary events, including natural disasters, political disruptions, domestic and international terrorist attacks and acts of war could adversely affect the economy generally, our
business and operations specifically and the demand for our products. The occurrence of extraordinary events cannot be predicted and their occurrence could adversely affect our results.
Extensive governmental regulations impact our operations and assets, and compliance with these regulations could adversely affect our results.
Our business operations are subject to numerous foreign, federal, state and local regulations which may have a significant effect on the costs of operations including extensive
environmental, health and safety regulations.
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We are and expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. Certain environmental requirements provide for strict
and, under certain circumstances, joint and several liability for investigation and remediation of releases of hazardous substances into the environment and liability for related damages. It is
difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future results. We anticipate that compliance
will continue to require increased capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising out of discovery of previously unknown conditions
or more aggressive enforcement actions, could adversely affect our results. Additionally, any such increase in costs or unanticipated liabilities may exceed our reserves, which could
adversely affect our results.
Because we maintain a self-insured health care plan for our employees, increases in health care costs could adversely affect our results.
We maintain a self-insured health care plan for our employees and certain retirees under which we generally share the cost of health care with our employees and retirees. Health
care costs have been escalating over the past several years. Accordingly, as general health care costs increase, our health care expenses also increase. Such increase in costs could
adversely affect our results.
Our business could be adversely affected by risks typically encountered by international operations.
We conduct our business in several foreign jurisdictions and are subject to the risks normally associated with international operations, including the following:
•
•
•
•
•
•
•
•
•
•
fluctuations in currency exchange rates;
transportation delays and interruptions;
political and economic instability and disruptions;
the imposition of duties and tariffs;
import and export controls;
government control of capital transactions;
the risks of divergent business expectations or cultural incompatibility inherent in establishing joint ventures with foreign partners;
difficulties in staffing and managing multi-national operations;
limitations on our ability to enforce legal rights and remedies; and
potentially adverse tax consequences.
Any of these events could adversely affect our international operations and our results.
Some of our employees are covered by collective bargaining agreements. The failure to renew any of those agreements on acceptable terms could increase cost or result in a
prolonged work stoppage, which could adversely affect our results.
Approximately 28% or about 460 of our employees are covered by four separate collective bargaining agreements. We cannot be assured that any of these agreements will be
renewed on similar terms or renegotiated on acceptable terms in the future. Any prolonged work stoppages in one or more of our facilities could adversely affect our results.
Lower investment performance by our pension assets may require us to begin making contributions to the pension fund, which would divert funds from other uses.
We do not anticipate being required to make cash contributions to the pension fund until 2010. However, in order to manage the pension fund over the long term, we may find it
prudent to make contributions before 2010. In addition, we
11
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cannot predict whether changing conditions including interest rates, pension assets performance, discount rates, government regulation or other factors will lead or require us to make
contributions earlier than or in excess of our current expectations. Additionally, we may not have the funds necessary to meet any minimum pension funding requirements.
Fluctuations in our operating results and other factors could contribute to volatility in the market price of our stock.
Historically, our stock price has experienced considerable volatility. We expect that our stock price will continue to experience volatility in the future due to a variety of potential factors
such as:
•
•
•
•
fluctuations in our results of operations and cash flows;
variations between our actual financial results and published analysts’ expectations;
technological innovations or new product introductions by us or our competitors; and
limited liquidity of our stock.
These factors and others could adversely affect the market price of our stock in the future.
Failure to protect intellectual property could adversely affect our results.
For certain products we rely on trademark, trade secret, patent and copyright laws to protect our intellectual property. We cannot be sure that these intellectual property rights will be
successfully asserted in the future or that they will not be invalidated or circumvented. In addition, laws of some foreign countries in which our products are or may be sold do not protect
our intellectual property rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its proprietary information could make us less
competitive and could adversely affect our results.
We could be subject to an adverse litigation judgment which could adversely affect our result.
From time to time, the Company is subject to various claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other
matters arising out of the Company’s business. The ultimate resolution of any litigation is inherently unpredictable. Moreover, there can be no assurance that we will have any or adequate
insurance coverage to protect the Company from any adverse litigation judgment. The Company’s estimate of liability, if any, is subject to change and the actual result may differ materially
from the Company’s estimate. An adverse litigation judgment could adversely affect our results.
We have substantial debt.
As of November 30, 2007, we had $149.9 million of total indebtedness outstanding. Our debt agreements may restrict our ability to raise additional equity capital, borrow additional
funds, make capital expenditures, or sell our assets. The degree to which we are leveraged could make us more vulnerable to adverse general economic conditions. Additionally, the
servicing of our debt will reduce funds available for operations and capital reinvestment.
Our ability to make scheduled payments or refinance our debt will depend on our future financial and operating performance, which could be adversely affected by prevailing
economic conditions, financial, business and other factors, some of which are beyond our control. There can be no assurance that our operating results, cash flows and capital resources
will be sufficient to pay our indebtedness. If our operating results, cash flows, or capital resources prove inadequate, we could face substantial liquidity challenges and might be required to
dispose of material assets or operations or delay planned expansions and capital expenditures, restructure or refinance our debt, or seek additional equity capital. There can be no
assurance that any of these actions could be affected on satisfactory terms or that future financing would be available to fund the operations of the business.
Item 1B.
Unresolved Staff Comments
Not Applicable
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Item 2.
Properties
The Company’s significant operating, manufacturing, distribution, research, design and/or sales and marketing facilities are set forth below:
Corporate Headquarters:
OMNOVA Solutions Inc.
*175 Ghent Road
Fairlawn, OH
Performance Chemicals:
Headquarters:
*175 Ghent Road
Fairlawn, OH
Decorative Products:
Headquarters:
*175 Ghent Rd
Fairlawn, OH
OMNOVA Solutions Technology Center
2990 Gilchrist Road
Akron, OH
Sales/Manufacturing/Technical/Distribution:
Akron, OH
Calhoun, GA
Chester, SC
*Dalton, GA
Fitchburg, MA
Green Bay, WI
*Hertfordshire, England
Mogadore, OH
*Shanghai, China
Sales/Marketing/Design/Distribution:
*Asnieres, France
*Bangkok, Thailand
*Dubai, UAE
*Hertfordshire, England
*Paris, France
*Rayong, Thailand
*Shanghai, China
*Warsaw, Poland
*Dang Guan City, China
Manufacturing Facilities:
Auburn, PA
Columbus, MS
*Dupo, IL
Jeannette, PA
Kent, England
Monroe, NC
*Rayong, Thailand
*Shanghai, China
*Taicang, China
* An asterisk next to a facility listed above indicates that it is a leased property.
For a further discussion of our leased properties, please refer to Note N to the Consolidated Financial Statements of this report.
During 2007, we generally made effective use of our productive capacity. We believe that the quality and productive capacity of our properties are sufficient to maintain our
competitive position for the foreseeable future.
Item 3.
Legal Proceedings
From time to time, the Company is subject to various claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other
matters arising out of the Company’s business. The ultimate resolution of any litigation is inherently unpredictable. As a result, the Company’s estimates of liability, if any, are subject to
change and actual results may materially differ from the Company’s estimates. In addition, the effect that the ultimate resolution of these matters may have on the financial condition,
results of operations or cash flow of the Company is difficult to predict because any such effect depends on both future results of operations and the amount and timing of the resolution of
these matters. However, based on information currently available to the Company, the Company has not recorded any material accruals for probable loss contingencies and does not
believe it is reasonably possible that the ultimate resolution of these matters will have a material effect on the consolidated financial condition, results of operations or cash flows of the
Company.
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Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of OMNOVA Solutions’ security holders, through the solicitation of proxies or otherwise, during the quarter ended November 30, 2007.
Item 4A.
Executive Officers of the Registrant
The following information is given as of January 25, 2008, and except as otherwise indicated, each individual has held the same office during the preceding five-year period.
Kevin M. McMullen, age 47, Chairman of the Board, Chief Executive Officer and President of the Company since February 2001. Prior to that, Mr. McMullen served as Chief
Executive Officer and President of the Company from December 2000 and as a Director from March 2000. From January 2000 until December 2000, Mr. McMullen served as President
and Chief Operating Officer of the Company, and from September 1999 to January 2000, Mr. McMullen served as Vice President of the Company and President, Decorative & Building
Products. Previously, Mr. McMullen was Vice President of GenCorp Inc. and President of GenCorp’s Decorative & Building Products business unit from September 1996 until the spin-off of
OMNOVA Solutions in October 1999. Prior to that, Mr. McMullen was General Manager of General Electric Corporation’s Commercial & Industrial Lighting business from 1993 to 1996 and
General Manager of General Electric Lighting’s Business Development and Strategic Planning activities from 1991 to 1993. Mr. McMullen was a management consultant with McKinsey &
Co. from 1985 to 1991.
Michael E. Hicks, age 49, Senior Vice President and Chief Financial Officer of OMNOVA Solutions Inc. since its formation. Prior to the spin-off of OMNOVA Solutions in October
1999, Mr. Hicks served as Senior Vice President, Chief Financial Officer and Treasurer of GenCorp Inc. from February 1999 and as Treasurer of GenCorp from September 1994 to
February 1999.
James C. LeMay, age 51, Senior Vice President, Business Development; General Counsel of OMNOVA Solutions Inc. since December 1, 2000; previously Senior Vice President,
Law and General Counsel of OMNOVA Solutions Inc. since its formation. Prior to the spin-off of OMNOVA Solutions in October 1999, Mr. LeMay also served as Assistant General Counsel
of GenCorp Inc. from May 1997, and as Senior Counsel of GenCorp from May 1990 to May 1997.
Douglas E. Wenger, age 51, Senior Vice President and Chief Information Officer of the Company since November 2001. Prior to joining OMNOVA in October 2001, Mr. Wenger
served as Director, Global I/T Strategy and Architecture from 2000 until 2001; as Global Program Director, Enterprise Business Applications from 1996 until 2000; Director, Business
Information Development, Worldwide Research & Development from 1993 until 1996; and as Director, North American Information Systems and Database Development from 1991 until
1993, in each case for Kellogg Company, a manufacturer and marketer of ready-to-eat cereal and convenience foods.
James J. Hohman, age 59, Vice President of the Company since November 2001 and President, Performance Chemicals since February 2005; President, Paper & Carpet
Chemicals from December 2000 until February 2005; Vice President, Specialty Chemicals from March 2000 until November 2000; and Vice President, Paper Chemicals from the spin-off of
the Company from GenCorp Inc. in October 1999 until March 2000. Prior to the spin-off, Mr. Hohman served for GenCorp Inc. as Vice President, Paper Chemicals from November 1998
until October 1999 and as Director, Strategic Business Development, Performance Chemicals business unit from March 1996 until October 1998. Previously, Mr. Hohman held several key
business and marketing management positions at BP Chemicals from 1982 until 1996, most recently serving as General Manager, Barex Resins.
Robert H. Coleman, age 53, President, Decorative Products since July 2003. Prior to joining OMNOVA, Mr. Coleman served as Vice President and General Manager, Graphics
North America from 2000 until 2002; as Vice President and General Manager, Fasson Roll, Europe from 1997 until 2000; as Vice President and General Manager, Packaging and Product
Identification Sector in 1997; and as Vice President and General Manager, Fasson Films Division from 1993 until 1997, in each case for Avery Dennison Corporation, Pasadena, California
(a manufacturer of pressure-sensitive adhesives and materials and consumer and converted products).
The Company’s executive officers generally hold terms of office of one year and/or until their successors are elected.
14
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Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
The Company’s common stock is listed on the New York Stock Exchange and trades under the symbol OMN. At November 30, 2007, there were 8,640 holders of record of the
Company’s common stock. Information regarding the high and low quarterly sales prices of the Company’s common stock is contained in the Quarterly Financial Data (Unaudited) which
appears on page 63 of this report and is incorporated herein by reference.
Information concerning long-term debt appears in Note L to the Consolidated Financial Statements and is incorporated herein by reference.
Information concerning securities authorized for issuance under the Company’s equity compensation plans is set forth in Equity Compensation Plan Information of Item 12 in this
Annual Report on pages 64 and 65 and is incorporated herein by reference.
The graph below compares the cumulative 5-year total return of holders of OMNOVA Solutions Inc.’s common stock with the cumulative total returns of the S&P 500 index and the
S&P Industrials index. The graph assumes that the value of the investment in the Company’s common stock and in each of the indexes (including reinvestment of dividends) was $100 on
11/30/2002 and tracks it through 11/30/2007.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
15
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Item 6.
Selected Financial Data
The following table sets forth the Company’s selected historical financial data. The selected historical financial data as of November 30, 2007, 2006, 2005, 2004, and 2003 and for
each of the five years in the period ended November 30, 2007 are derived from the Company’s audited consolidated financial statements.
Statement of operations data:
Net Sales
Costs and Expenses:
Cost of products sold
Selling, general and administrative
Depreciation and amortization
Goodwill and indefinite lived trademark impairments(2)
Fixed asset impairment
Restructuring and severance(3)
Interest expense
Equity (earnings) loss in affiliates
Debt redemption expense(4)
Other (income) expense, net
Deferred financing costs write-off
2007
2006
2005
2004
2003
(Dollars in millions, except per share data)
$
$
$
$
745.5
605.2
99.1
20.1
—
—
1.0
16.5
(1.2)
12.4
(.7)
—
699.1
549.2
105.6
20.2
1.0
.1
1.3
21.3
(2.3)
—
(.6)
—
$
$
$
$
695.0
542.6
105.7
21.1
—
2.5
5.4
22.6
(.7)
—
(1.2)
—
$
$
630.7
480.7
126.0
21.6
3.9
—
.4
22.4
.6
—
.8
—
584.3
437.3
121.4
32.6
49.6
—
9.0
17.1
.8
—
.8
3.1
Total
$
752.4
$
695.8
$
698.0
$
656.4
$
671.7
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
(6.9)
.1
3.3
.1
(3.0)
(.3)
(25.7)
(.3)
(87.4)
(.6)
Income (loss) from continuing operations
Discontinued Operations, net of tax:
Income (loss) from operations
Gain on sale
Income from discontinued operations
Net income (loss)
Basic income (loss) per share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per share
Diluted income (loss) per share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per share
General:(1)
Capital expenditures
Total assets(2)
Long-term debt(4)
(7.0)
3.2
(2.7)
(25.4)
(86.8)
.3
—
(.1)
18.2
.3
18.1
.9
—
.9
1.0
—
1.0
3.0
—
3.0
(6.7)
$
21.3
$
(1.8)
$
(24.4)
$
(83.8)
(.17)
.01
$
.08
.44
$
(.06)
.02
$
(.64)
.03
$
(2.18)
.08
(.16)
$
.52
$
(.04)
$
(.61)
$
(2.10)
(.17)
.01
$
.08
.43
$
(.06)
.02
$
(.64)
.03
$
(2.18)
.08
(.16)
$
.51
$
(.04)
$
(.61)
$
(2.10)
16.2
326.4
144.6
$
$
$
13.0
338.9
165.0
$
$
$
12.4
358.3
176.3
$
$
$
11.2
432.5
181.5
$
$
$
8.6
438.9
192.2
$
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
The Company has not declared a dividend for any period presented.
During 2006, 2004 and 2003, the Company recorded goodwill and indefinite-lived intangible asset impairment charges of $1.0 million, $3.9 million and $49.6 million, respectively,
related to SFAS No. 142.
Restructuring and severance consisted primarily of severance costs in 2007, severance costs, asset write-downs and costs for the closure of a European sales office in 2006, the
closure of the Company’s wallcovering distribution facility and the closure of a design center in 2005, severance costs in 2004 and severance costs and asset write-downs in 2003.
On May 22, 2007, the Company entered into a $150 million Term Loan Credit Agreement (“Term Loan”). Proceeds of the Term Loan, along with cash and other resources of the
Company were used to redeem the Company’s $165 Million 11 1 /4% Senior Secured Notes. Additionally, the Company paid $9.8 million in premium and tender fees and wrote off $2.6
million of deferred financing costs.
16
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is an innovator of emulsion polymers, specialty chemicals, and decorative and functional surfaces for a variety of commercial, industrial and residential end uses. As
discussed in Item 1, Business, the Company operates in two reportable business segments: Performance Chemicals and Decorative Products. The Performance Chemicals segment
produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene, styrene butadiene acrylonitrile, vinyl pyridine, polyvinyl acetate, acrylic,
styrene acrylic, vinyl acrylic, glyoxal and fluorochemical chemistries. Performance Chemicals’ custom-formulated products are tailored for coatings, binders and adhesives, which are used
in paper, carpet, nonwovens, textiles, construction, floor polish, masking tape, adhesives, tire cord, plastic parts and various other applications. The Decorative Products segment develops,
designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated and performance fabrics, printed and solid color
surface laminates and performance films. These products are used in numerous applications, including commercial building refurbishment, remodeling and new construction, residential
cabinets, flooring and furnishings, transportation markets including school busses, marine and automotive, recreational vehicles, manufactured housing and a variety of industrial films.
Please refer to Item 1, Business, of this Annual Report on Form 10-K for further description of and background on the Company’s operating segments.
The Company’s products are sold to manufacturers, independent distributors and end users through internal marketing and sales forces and agents.
The Company has strategically located manufacturing facilities in the U.S. and U.K. along with its joint venture manufacturing facilities in China and Thailand. During the first quarter
of 2008, we acquired the remaining equity interests in these joint ventures. As a result, both the China and Thailand businesses will be reflected as wholly-owned subsidiaries in 2008.
The Company has historically experienced stronger sales and income in its second, third and fourth quarters, comprised of the three-month periods ending May 31, August 31 and
November 30. The Company’s performance in the first quarter (December through February) has historically been weaker due to generally lower levels of customer manufacturing,
construction and refurbishment activities during the holidays and cold weather months.
The Company’s chief operating decision maker evaluates performance and allocates resources by operating segment. Segment information has been prepared in accordance with
the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures About Segments of an Enterprise and Related
Information.” The Company’s two operating segments were determined based on products and services provided. Accounting policies of the segments are the same as those described in
Note A—Significant Accounting Policies, of the Company’s Consolidated Financial Statements. For a reconciliation of the Company’s segment operating performance information, please
refer to Note P of the Company’s Consolidated Financial Statements.
Effective December 1, 2006, the Company renamed its Commercial Wallcoverings product line Contract Interiors and realigned certain product sales from the Coated Fabrics product
line to Contract Interiors in order to better reflect common sales and marketing resources used to serve customers. All prior period amounts have been reclassed to conform to current year
presentation.
Key Indicators
Key economic measures relevant to the Company include coated paper production, print advertising spending, U.S. commercial real estate and hotel occupancy rates, U.S. office
furniture sales, manufactured housing shipments, housing starts and sales of existing homes and forecasts of raw material pricing for certain petrochemical feed stocks. Key OEM
industries which provide a general indication of demand drivers to the Company include paper, commercial building construction, housing, furniture manufacturing and flooring
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.
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Key operating measures utilized by the business segments include orders, sales, working capital turnover, inventory, productivity, new product vitality and order fill-rates which
provide key indicators of business trends. 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, gross profit, selling, general and administrative expenses, operating profit before excluded items, consolidated earnings before interest, taxes, depreciation and amortization
as set forth in the Company’s $150,000,000 Term Loan Credit Agreement (“Consolidated EBITDA”), working capital, operating cash flows, capital expenditures and earnings per share
before excluded items, including applicable ratios such as inventory turnover, average working capital, return on sales and assets and leverage ratios. These measures, as well as
objectives established by the Board of Directors of the Company, are reviewed at monthly, quarterly and annual intervals and compared with historical periods.
Results of Operations of 2007 Compared to 2006
The Company’s net sales in 2007 were $745.5 million as compared to $699.1 million in 2006. The Company’s Performance Chemicals business segment revenue increased by 7.6%
while the Decorative Products business segment revenue increased 4.9%. Contributing to the sales increase in 2007 were improved volumes of $27.9 million, sales price increases of
$11.6 million and favorable foreign exchange translation of $6.9 million.
Gross profit in 2007 was $140.3 million with a gross profit margin of 18.8% compared to gross margin of $149.9 million and a gross profit margin of 21.4% in 2006. Cost of goods sold
for 2007 increased $56.0 million to $605.2 million, compared to the same period last year driven by higher raw material costs of $18.6 million, manufacturing costs of $33.4 million related to
the increased volumes and higher transportation costs of $4.0 million.
Selling, general & administrative expenses of $99.1 million in 2007 were $6.5 million, or 6.2%, lower than 2006. The decease in 2007 was primarily due to lower employee and
professional service costs of $2.9 million, lower supplies and utility costs of $1.0 million and other cost reductions of $2.6 million.
Interest expense of $16.5 million in 2007 was $4.8 million lower than 2006 primarily due to lower debt levels and lower interest rates as a result of the Company’s debt refinancing in
May 2007.
As described under Long Term Debt, on May 22, 2007, the Company entered into a $150 million Term Loan. The Term Loan carries a variable interest rate based on, at the
Company’s option, either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The proceeds of the Term Loan, along with cash and other resources of the
Company, were used to redeem its $165 Million 11 1 /4% Senior Secured Notes. In connection with the redemption of the Notes, the Company paid $9.8 million in premium and tender fees
and wrote off $2.6 million of unamortized debt issuance costs. Additionally, the Company entered into a $50 million notional amount interest rate swap to fix the interest rate on a portion of
the Term Loan. As of November 30, 2007, the weighted average interest rate on the Company’s outstanding debt was 7.5% as compared to a rate of 11.25% at November 30, 2006. At
debt levels and weighted average interest rates which existed at November 30, 2007, the Company’s annualized interest expense savings would be approximately $6.0 million as
compared to November 30, 2006. As a portion of the interest rates are variable, future interest rates may increase or decrease and the Company’s future debt levels may change due to
required or voluntary principal payments. Therefore, actual interest expense savings may be materially different.
Equity earnings in affiliates were $1.2 million in 2007, compared to $2.3 million in 2006. The decrease in 2007 was primarily due to higher raw material costs in Asia, one time start-
up costs for a new plant in China and higher tax charges.
The Company had a loss from continuing operations of $7.0 million, or $0.17 per diluted share, and net loss of $6.7 million in 2007, or $0.16 per diluted share, compared to income
from continuing operations in 2006 of $3.2 million, or $0.08 per diluted share and net income of $21.3 million, or $0.51 per diluted share. Included in 2007 are debt redemption costs of
18
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$12.4 million and an adjustment to discontinued operations of $0.3 million. Included in 2006 net income is a gain on the sale of the Building Products business, classified as discontinued
operations, of $18.2 million, or $0.43 per diluted share. No domestic tax provision was provided in either 2007 or 2006 due to the net loss in 2007 and the utilization of the Company’s net
operating loss carryforwards in 2006.
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 chief operating
decision maker in evaluating performance and allocating resources.
The following table reconciles segment sales to consolidated net sales and segment operating profit to consolidated income (loss) from continuing operations before income taxes:
Segment Sales:
Performance Chemicals
Decorative Products
Consolidated net sales
Segment Operating Profit:
Performance Chemicals
Decorative Products
Interest expense
Corporate expense
Debt redemption expense
Year Ended November 30,
2007
2006
$
$
$
475.3
270.2
745.5
23.8
8.6
(16.5)
(10.4)
(12.4)
$
$
$
441.6
257.5
699.1
29.7
9.0
(21.3)
(14.1)
—
Consolidated income (loss) from continuing operations before income tax
$
(6.9)
$
3.3
Performance Chemicals
Performance Chemicals’ net sales increased 7.6% to $475.3 million during 2007 compared to $441.6 million during 2006, driven by volume increases of $20.6 million, higher selling
prices of $11.3 million and $1.8 million of favorable foreign exchange translation. Net sales for the Paper and Carpet chemicals product line increased to $308.9 million during 2007
compared to $290.7 million during 2006, primarily as a result of higher selling prices of $10.4 million and volume increases of $7.8 million due to an increase in market share in paper which
was partially offset by lower volumes in carpet due to the slow down in the carpet industry resulting from reduced new housing starts. The Company expects the overall carpet market to
remain weak through the first half of 2008. Net sales for the Specialty Chemicals product line increased to $166.4 million during 2007 compared to $150.9 million during 2006, primarily due
to volume increases of $12.8 million, higher selling prices of $0.9 million and favorable foreign exchange translation of $1.8 million.
This segment generated an operating profit of $23.8 million in 2007 compared to $29.7 million in 2006. The decrease in segment operating profit was due to higher raw material costs
of $20.7 million, increased transportation costs of $3.5 million and lower LIFO inventory reserve reductions of $1.4 million, partially offset by selling price increases of $11.3 million, higher
volume of $1.8 million, lower utility costs of $0.8 million and cost reductions of $4.7 million. The segment operating profit also includes items which management excludes when evaluating
the results of the Company’s segments. Those items for 2007 included a gain on the sale of an office facility in South Carolina of $0.7 million and for 2006 included restructuring and
severance charges of $0.4 million.
LIFO inventory reserve reductions increased Performance Chemicals’ segment operating profit by $0.2 million in 2007 and $2.1 million in 2006.
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Table of Contents
Decorative Products
Decorative Products net sales increased by 4.9% to $270.2 million in 2007 from $257.5 million in 2006. Contract Interiors net sales of $122.3 million during 2007 were $8.6 million
higher than 2006 primarily due to higher volume in European wallcovering and favorable foreign exchange rates from the British Pound Sterling and the Euro. Net sales for the Coated
Fabrics product line increased 6.9% to $77.8 million during 2007 compared to $72.8 million during 2006, primarily as a result of higher volume in transportation of $4.1 million. Net sales for
the Laminates product line decreased 1.3% to $70.1 million during 2007 compared to $71.0 million during 2006, primarily due to lower volume in kitchen and bath, furniture and flooring of
$6.4 million, partially offset by higher volume in consumer electronics, display and other segments of $5.5 million. The kitchen and bath market is expected to remain weak through the first
half of 2008.
This segment generated an operating profit of $8.6 million during 2007 compared to $9.0 million during 2006. The decrease in segment operating profit for 2007 was due to higher
health care, utilities and transportation costs of $1.1 million, higher manufacturing and maintenance costs of $3.5 million, ERP system implementation costs of $0.5 million, and lower
income from the Company’s joint ventures of $1.1 million due to higher raw material costs in Asia and start-up costs related to a new manufacturing plant near Shanghai, offset by lower
domestic raw material costs of $2.1 million, the profit on additional volumes of $1.3 million, higher LIFO inventory reserve reductions of $1.1 million and higher selling prices of $0.3 million.
The segment operating profit also includes items which management excludes when evaluating the results of the Company’s segments. Those items for 2007 were restructuring and
severance charges of $0.8 million resulting primarily from workforce reductions. Those items for 2006 included $1.0 million for a non-cash trademark impairment charge, asset impairment
charges of $0.1 million and restructuring and severance charges of $0.7 million relating to workforce reductions and the closure of a European sales office.
LIFO reserve reductions positively impacted Decorative Products segment operating profit by $0.7 million in 2007 and $0.1 million in 2006.
Corporate
Interest expense decreased to $16.5 million in 2007 from $21.3 million in 2006. The decrease is due to lower average debt outstanding and a reduction in average interest rates.
Corporate expenses decreased to $10.4 million in 2007 from $14.1 million in 2006 primarily due to lower employee costs, lower incentive and deferred compensation plan expense
compared to prior year and lower professional service costs. Included in each of 2007 and 2006 are restructuring and severance expense of $0.2 million.
The Company recorded a tax expense of $0.1 million in both 2007 and 2006. The expense recorded in both years was primarily due to foreign taxes. The effective rates of 0.7% in
2007 and 2.2% in 2006 were below the statutory rate of 35% primarily due to the Company’s net tax loss carryforwards. Valuation allowances have been provided for deferred tax assets
as a result of the Company’s prior losses. At present, the Company has $133.0 million of domestic federal net operating loss carryforwards.
Results of Operations of 2006 Compared to 2005
The Company’s net sales in 2006 were $699.1 million as compared to $695.0 million in 2005. The Company’s Decorative Products business segment experienced a 6.3% revenue
increase while the Performance Chemicals business segment revenue decreased by 2.5%. Included in Decorative Products net sales for 2005 were $2.7 million of net sales relating to the
Company’s former wallcovering distribution facility, which the Company exited in the first quarter of 2005. Excluding these sales, net sales for the Decorative Products segment increased
7.5%.
Gross profit in 2006 was $149.9 million with a gross profit margin of 21.4% compared to gross profit of $152.4 million and a gross profit margin of 21.9% in 2005. Cost of goods sold
for 2006 increased $6.6 million to $549.2 million, compared to the same period last year driven by higher raw material costs of $21.0 million and higher transportation costs of $1.8 million,
partially offset by lower volume of $13.0 million and lower manufacturing and other costs of $3.2 million.
Selling, general & administrative expenses were $105.6 million in 2006 compared to $105.7 million in 2005.
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Non-cash, indefinite lived trademark impairment charges were $1.0 million in 2006 compared to zero in 2005, as the Company wrote off the remaining balance of its Decorative
Products trademark in Europe. During the fourth quarter of 2006, the Company determined that this trademark was fully impaired due to lower sales and margins under the trademark
brand in the European market.
Fixed asset impairment charges of $0.1 million in 2006 related to the planned demolition of a building at the Company’s Jeannette, Pennsylvania facility. This compares to
impairment charges of $2.5 million in 2005 relating to the idling of certain production assets at the Company’s Jeannette, Pennsylvania and Mogadore, Ohio facilities.
Restructuring and severance charges were $1.3 million in 2006 compared to $5.4 million in 2005. In 2006, the Company recorded $0.7 million for the closure of one European
wallcovering sales facility and $0.6 million for domestic workforce reduction costs. The Company terminated 29 employees in connection with these workforce reductions and all payments
were completed during 2007. In 2005, the Company recorded $3.2 million in exit costs as it closed a distribution facility due to the appointment of a new distributor, and also recognized
$2.2 million of workforce reduction costs. The Company terminated 61 employees in connection with these workforce reductions and all payments were completed by the end of 2006.
Interest expense of $21.3 million in 2006 was $1.3 million lower than 2005 primarily due to lower average debt and applicable interest rate spreads, partially offset by higher short-
term interest rates.
Equity earnings in affiliates were $2.3 million in 2006, compared to $0.7 million in 2005. The increase in 2006 was primarily due to higher sales volume in Asia as demand in that
region continues to grow.
The Company had income from continuing operations of $3.2 million in 2006, or income of $.08 per diluted share, compared to a loss of $2.7 million in 2005, or a loss of $0.06 per
diluted share. The Company had net income of $21.3 million in 2006, or $0.51 per diluted share, compared to a net loss of $1.8 million in 2005, or a loss of $0.04 per diluted share.
Included in 2006 net income is a gain on the sale of the Building Products business, classified as discontinued operations, of $18.2 million, or $0.43 per diluted share. No tax provision was
provided due to the utilization of the Company’s net operating loss carryforwards.
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 chief operating
decision maker in evaluating performance and allocating resources.
The following table reconciles segment sales to consolidated net sales and segment operating profit to consolidated income (loss) from continuing operations before income taxes:
Segment Sales:
Performance Chemicals
Decorative Products
Consolidated net sales
Segment Operating Profit:
Performance Chemicals
Decorative Products
Interest expense
Corporate expense
Debt redemption expense
Year Ended November 30,
2006
2005
$
$
$
441.6
257.5
699.1
29.7
9.0
(21.3)
(14.1)
—
$
$
$
452.8
242.2
695.0
33.8
(2.8)
(22.6)
(11.4)
—
Consolidated income (loss) from continuing operations before income tax
$
3.3
$
(3.0)
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Performance Chemicals
Performance Chemicals’ net sales decreased 2.5% to $441.6 million in 2006 from $452.8 million in 2005 primarily as a result of lower volume of $30.2 million, which was partially
offset by product pricing actions of $19.0 million. Net sales for the paper and carpet chemicals product line decreased 2.4% to $290.7 million in 2006 from $297.9 million in 2005 due to
lower volumes of $17.2 million as a result of lower new residential construction and customers reducing inventories, partially offset by pricing actions of $10.0 million. Net sales for the
specialty chemicals product line decreased 2.6% to $150.9 million in 2006 compared to $154.9 million in 2005 primarily due to lower volumes of $13.0 million, partially offset by pricing
actions of $9.0 million.
The segment generated an operating profit of $29.7 million for 2006 as compared to an operating profit of $33.8 million in 2005. The lower segment operating profit resulted primarily
from higher raw material costs of $16.9 million, lower volumes of $9.1 million, higher utilities and transportation costs of $3.4 million and higher non-cash pension expense of $1.3 million,
partially offset by product pricing increases of $19.0 million and cost reductions and other items of $7.6 million. The segment operating profit also includes items which management
excludes when evaluating the results of the Company’s segments. Those items for 2006 included restructuring and severance charges of $0.4 million and for 2005 included an asset
impairment charge of $0.9 million and restructuring and severance charges of $0.7 million resulting primarily from workforce reductions.
The segment operating profit of Performance Chemicals was positively impacted by LIFO inventory reserve adjustments of $2.1 million and $0.3 million in 2006 and 2005,
respectively.
Decorative Products
Decorative Products’ net sales increased to $257.5 million in 2006 as compared to $242.2 million in 2005. Included in net sales for 2005 were $2.7 million of net sales reported as
commercial wallcovering net sales, relating to the Company’s former wallcovering distribution facility. Excluding the net sales of the former wallcovering distribution facility, 2006 net sales
of $113.7 million for contract interiors were $22.7 million higher than 2005 primarily due to higher domestic volumes, partially offset by $0.4 million of unfavorable foreign exchange rates
from the British Pound Sterling and the Euro. Net sales for the coated fabrics product line decreased 18.5% to $72.8 million in 2006 compared to $89.3 million in 2005, primarily as a result
of higher volumes in transportation, performance films and rigids, which were offset by lower volumes in residential furniture and pool liners. Net sales for the laminates product line
increased 19.9% to $71.0 million in 2006 compared to $59.2 million in 2005, primarily due to higher volume in kitchen and bath and manufactured housing applications of $15.3 million,
partially offset by lower volume in consumer electronics and other segments of $3.5 million.
The segment generated an operating profit of $9.0 million for 2006 as compared to an operating loss of $2.8 million for 2005. The improvement in the segment operating profit was
primarily due to product pricing increases of $2.8 million, higher volume of $3.5 million, higher income from the Company’s joint ventures of $1.6 million and cost and productivity
improvements of $8.6 million, partially offset by higher raw material costs of $4.1 million, higher utilities costs of $1.0 million and higher non-cash pension expense of $3.1 million. The
Company’s joint ventures have experienced higher revenues as demand in the Asian region continues to increase. The segment operating profit also includes items which management
excludes when evaluating results of the Company’s segments. Those items for 2006 included $1.0 million for a non-cash trademark impairment charge, asset impairment charges of $0.1
million and restructuring and severance charges of $0.7 million relating to workforce reductions and the closure of a European sales office. Those items for 2005 included the gain on the
sale of the Lanark ® wallcovering brand of $0.8 million, the gain on the settlement of a retiree health care dispute of $0.9 million, an asset impairment charge of $1.6 million, restructuring
and severance charges of $5.1 million and work stoppage costs of $1.7 million related to a work stoppage earlier in the year at its Jeannette, Pennsylvania facility.
The segment operating profit of Decorative Products was positively impacted by LIFO inventory reserve adjustments of $0.1 million in 2006 and negatively impacted by $0.4 million in
2005.
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Corporate
Interest expense decreased to $21.3 million in 2006 from $22.6 million in 2005. The decrease was primarily due to lower average debt and applicable interest rate spreads, partially
offset by higher short-term interest rates.
Corporate expenses increased to $14.1 million in 2006 from $11.4 million in 2005 primarily due to higher pension expense of $0.6 million, higher auditing and SOX related fees of
$0.4 million, higher information technology spending associated with a SAP system implementation of $0.2 million, expense of $0.6 million associated with a strategic growth initiative and
higher restructuring and severance expense of $0.1 million.
The Company recorded a tax expense of $0.1 million in 2006 compared to a tax benefit of $0.3 million in 2005. The expense recorded in 2006 was primarily due to foreign taxes. The
benefit recorded in 2005 was primarily due to a refund as a result of an amended return filed for 2000. The effective rates of 2.2% in 2006 and 13.8% in 2005 were below the statutory rate
of 35% primarily due to the Company’s net tax loss carryforwards. Valuation allowances have been provided for deferred tax assets as a result of the Company’s prior losses. The
Company had $114.2 million of domestic federal net operating loss carryforwards.
Discontinued Operations
On September 27, 2006, the Company sold substantially all of the assets and liabilities of the Building Products business to BFS Diversified Products, LLC, for $25.9 million in cash
resulting in a gain of $18.2 million. No tax provision was provided due to the utilization of the Company’s net operating loss carryforwards. The Company retained $10.5 million of Building
Products trade accounts receivable, all of which were collected as of November 30, 2006.
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the results of operations and cash flows of the Building
Products business for all periods presented have been reported as discontinued operations. Additionally, the assets and liabilities of the Building Products business have been reclassified
as assets and liabilities held for sale at November 30, 2005. This transaction allows the Company to focus its resources in strategic product lines where it enjoys leading market positions
and will provide the Company with financial flexibility to grow its remaining segments.
The results of operations for the Building Products business reported as discontinued operations were:
(Dollars in millions)
Net sales
Net earnings (loss) from discontinued operations
Financial Resources and Capital Spending
The following table reflects key cash flow measures from continuing operations:
(Dollars in millions)
Cash provided by operating activities
Cash provided by (used) in investing activities
Cash used in financing activities
2007
2006
2005
$
$
—
.3
$ 93.4
(.1)
$
$ 115.1
.9
$
2007
2006
2005
$ 13.0
(2.4)
$
(24.4)
$
$ 10.9
.2
$
(9.9)
$
$ 11.7
(12.1)
$
(4.0)
$
Cash provided by operating activities was $13.0 million in 2007, compared to cash provided of $10.9 million and $11.7 million in 2006 and 2005, respectively. Cash provided by
operations increased in 2007 primarily due to a reduction in the use of working capital as compared to 2006. The decrease in 2006, as compared to 2005, was primarily due to changes in
working capital, including a reduction in accounts payable due to the timing of certain purchases for raw materials, partially offset by improved earnings. Days Sales Outstanding (“DSO”)
was 46.1 days during 2007 compared to 45.6 days during 2006. The increase was primarily due to higher sales and extended terms at certain large customers.
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Table of Contents
In 2007, $2.4 million was used in investing activities, as compared to $0.2 million provided by investing activities in 2006. During 2007, the Company used $12.4 million of restricted
cash in connection with its debt redemption and refinancing, as described in Note L – Long-Term Debt. Additionally, the Company incurred $16.2 million of capital expenditures in 2007,
compared to $13.0 million in 2006 and $12.4 million in 2005. Also included in 2006 was cash received from the sale of the Building Products business, partially offset by restricted cash
received. Capital expenditures were made and are planned principally for asset replacement, new product capability, cost reduction, safety and productivity improvements and
environmental protection. The Company anticipates capital expenditures in 2008 to be approximately $18.0 million. Additionally, during the first quarter of 2008, the Company purchased
the minority interests in its joint venture businesses for $28.0 million which was funded through borrowings under its revolving credit facility. The Company plans to fund substantially all of
its capital expenditures from anticipated cash flow generated from operations during the remainder of the year. If necessary, a portion of capital expenditures will be funded through
borrowings under its current credit facility.
Cash used for financing activities in 2007 was $24.4 million compared to $9.9 million in 2006 and $4.0 million in 2005. Included in 2007 are costs associated with the Company’s debt
refinancing including $9.8 million paid for premium and tender fees and $2.2 million paid for deferred financing costs incurred. Cash used in financing activities in 2006 and 2005 was
primarily related to payments under the revolving credit facility. Total debt was $149.9 million as of November 30, 2007, compared to $165.0 million as of November 30, 2006.
Long-Term Debt
On May 22, 2007, the Company entered into a $150 million Term Loan Credit Agreement due May 2014. The Term Loan carries a variable interest rate based on, at the Company’s
option, either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base interest rate is a fluctuating rate equal to the higher of the Prime Rate
or the sum of the Federal Funds Effective Rate plus 0.50%. The applicable margin for the alternate base rate is 1.50%. The eurodollar rate is a periodic fixed rate equal to the London Inter
Bank Offered Rate (“LIBOR”). The applicable margin for the eurodollar rate is 2.50%. Annual principal payments consist of $1.5 million, due in quarterly installments, and annual excess
free cash flow payments as defined in the Term Loan agreement, with any remaining balance to be paid May 2014. Required principal payments of $0.8 million were paid during 2007. An
estimated annual excess cash payment of $3.8 million is required to be paid by the Company by the end of February 2008. The Company can prepay any amount at any time without
penalty upon proper notice and subject to a minimum dollar requirement. Prepayments will be applied towards any required annual excess free cash flow payment. The Term Loan is
secured by all real property and equipment of the Company’s domestic facilities and stock and equity investments of the Company’s non-domestic subsidiaries. The Term Loan contains
affirmative and negative covenants, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. The Term Loan requires the
Company to maintain a net leverage ratio of less than 5.5 to 1. At November 30, 2007, the Company was in compliance with this requirement with a ratio of 2.9 to 1. The Term Loan also
requires the Company to maintain an interest rate swap of at least 1/3 of the outstanding principle balance. Additionally, the Term Loan also provides for additional borrowings of up to $75
million, provided that certain requirements are met including an interest coverage ratio and a senior secured leverage ratio. The Company has not utilized these additional borrowings as of
November 30, 2007.
Proceeds of the Term Loan, along with cash, restricted cash and other resources of the Company, were used to redeem the Company’s $165 Million 11 1 /4% Senior Secured Notes
(“Notes”). In connection with the redemption of the Notes, the Company paid $9.8 million in premium and tender fees. Additionally, the Company wrote off $2.6 million of unamortized debt
issuance costs which were being amortized over the term of the Notes.
On May 31, 2007, the Company entered into a 5 year fixed rate interest rate swap agreement totaling $50 million to convert a portion of the outstanding Term Loan from variable to
fixed rates. Under this agreement, the Company will pay a fixed rate of 7.73% and receive a variable rate based on LIBOR plus a margin of 2.50%. The variable rates on the interest rate
swap and $50 million of the Term Loan are reset every three months on the same base rate and same date, at which time the interest will be settled and will be recognized as adjustments
to interest expense. This swap agreement is designated as a cash flow hedge, and as such, any resulting gain or loss on the fair value of the derivative instrument will be recognized in
Accumulated other comprehensive income, until it is realized. The fair value of the swap as of November 30, 2007 was a loss
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Table of Contents
of $2.5 million, with a corresponding adjustment to other liabilities. The effective average interest rate for the Term Loan in 2007 was 8.3%. There was no ineffectiveness on the interest
rate swap recognized during 2007.
In connection with the Term Loan, on May 22, 2007 the Company amended its Senior Secured Revolving Credit Facility (“Facility”). The Facility was increased to $80 million from
$72 million and extended until May 2012. The Facility is secured by domestic accounts receivable, inventory (collectively the “Eligible Borrowing Base”) and intangible assets. Availability
under the Facility will fluctuate depending on the Eligible Borrowing Base and is determined by applying customary advance rates to the Eligible Borrowing Base. The Facility includes a
$15 million sublimit for the issuance of commercial and standby letters of credit and a $10 million sublimit for swingline loans. The Facility contains affirmative and negative covenants,
similar to the Term Loan, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. If the average excess availability of the
Facility falls below $20 million, the Company must maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement. The Company may request an increase in
available borrowings under the Facility of up to $20 million (for a maximum of $100 million) upon satisfaction of certain requirements. The Company has not utilized these additional
available borrowings as of November 30, 2007.
Advances under the Facility bear interest, at the Company’s option, at either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base
interest rate is a fluctuating rate equal to the higher of the Prime Rate or the sum of the Federal Funds Effective Rate plus 0.50%. The applicable margin for the alternate base rate will vary
from 0.0% to 0.25% depending on the Company’s fixed charge coverage ratio and the margin was 0.0% at November 30, 2007. The eurodollar rate is a periodic fixed rate equal to LIBOR.
The applicable margin for the eurodollar rate will vary from 1.25% to 2.0% depending on the Company’s fixed charge coverage ratio and the margin was 1.5% at November 30, 2007.
The Facility requires a commitment fee based on the unused portion of the Facility. The commitment fee will vary from 0.125% to 0.25% based on the Company’s fixed charge
coverage ratio and was 0.125% at November 30, 2007.
At November 30, 2007, the Eligible Borrowing Base under the Facility was $77.7 million, outstanding letters of credit were $3.4 million and amounts borrowed were $0.7 million. At
November 30, 2007, the amount available for borrowing under the Facility was $73.6 million.
As of November 30, 2007, the weighted total average interest rate on the Company’s outstanding debt was 7.5% as compared to an average rate of 10.8% in 2006. At debt levels
and weighted average interest rates, which existed at November 30, 2007, the Company’s annualized interest expense savings under the Term Loan would be approximately $6.0 million
as compared to under the notes. As a portion of the interest rates are variable, future interest rates may increase or decrease and the Company’s future debt levels may change due to
required or voluntary principal payments, therefore, actual interest expense savings may be materially different.
Subsequent Events
On December 28, 2007, the Company amended its Facility to increase the availability from $80 million to $90 million and allow the Company to utilize borrowings under the Facility to
purchase the minority interests of its Asian joint ventures. All terms, including applicable spreads on interest rates, remained the same. Total availability will vary throughout the year with
fluctuations in the borrowing base.
On January 7, 2008, the Company announced that it had completed the acquisition of the minority interests in its joint venture businesses, Decorative Products (Singapore) Pte., Ltd.
(“DPS”), a Singapore limited company, and CPPC – Decorative Products Co., Ltd. (“CPD”), a Thailand limited company. DPS is a holding company which owns 100% of both CG-
OMNOVA Decorative Products (Shanghai) Co., Ltd. (“CGO”) and Beston OMNOVA Plastics (Taicang) Co., Ltd. (“Taicang”). Both CGO and Taicang are registered and incorporated in the
Peoples Republic of China. The minority interests of both DPS and CPD, representing approximately 49.9% of their respective registered equity, was acquired from CPPC Public Company
Limited for $28.0 million in cash and a contingent payment of $2.0 million based on the achievement of certain 2008 financial results. The acquisition was effective as of December 31,
2007. As a result, these entities will be reflected as wholly-owned subsidiaries in 2008.
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Table of Contents
Contractual Obligation
(Dollars in millions)
Long-term debt
Operating leases
Purchase obligations
Other long-term liabilities recorded on balance sheet
Payments Due By Period
Less
Than 1
Year
Total
2 — 3
Years
4 — 5
Years
More
Than 5
Years
$ 149.9 $
21.8
5.5
23.1
5.3 $
5.0
1.3
2.3
3.0 $
7.7
2.0
3.1
3.0 $
4.7
2.2
3.1
138.6
4.4
—
14.6
Total
$ 200.3 $ 13.9 $
15.8 $
13.0 $
157.6
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 as of
November 30, 2007, 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 reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities as of the date of
the financial statements. Periodically, the Company reviews its estimates and judgments including those related to product returns, accounts receivable, inventories, warranty obligations,
litigation, 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 materially differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements:
A) Revenue Recognition
Sales must meet the following criteria in order to be recognized as revenue: 1) persuasive evidence of an arrangement exists; 2) product must be shipped to customer, thereby
assuring delivery, whereby shipment results in the transfer of ownership risk to the customer; 3) an established sales price has been set with the customer; 4) collection of the sale revenue
from the customer is reasonably assured; and 5) no contingencies exist. The Company estimates and records provisions for quantity rebates, sales returns and allowances in the period the
revenue is recognized, based upon its experience. These items are included as a reduction in net sales.
B) Allowance For Doubtful Accounts
The Company’s policy is to identify all specific customers that are considered doubtful of collection based upon the customer’s financial condition, payment history, credit rating and
other relevant factors, and those accounts that have been turned over for collection and to reserve the portion of such accounts receivable for which collection does not appear likely. If the
financial condition of our customers were to deteriorate, resulting in an inability to make payments, additional allowances may be required. The allowance for doubtful accounts was
approximately $1.6 million and $2.1 million at November 30, 2007 and 2006, respectively.
C) Allowance For Inventory Obsolescence
The Company’s policy is to maintain an inventory obsolescence reserve based upon specifically identified, discontinued or obsolete items and a percentage of quantities on hand
compared with usage and sales levels over the last year to two years. The policy has been applied on a consistent basis for all years presented. A sudden and unexpected change in
design trends and/or preferences for patterns, colors and/or material could reduce the rate of inventory turnover and require the Company to increase its reserve for obsolescence. The
reserve for inventory obsolescence, which applies primarily to our Decorative Products segment, was approximately $9.5 million and $9.9 million at November 30, 2007 and 2006,
respectively.
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Table of Contents
D) Litigation and Environmental Reserves
From time to time, the Company is subject to claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other matters
arising out of the Company’s business. The Company provides a reserve for such matters when it concludes a loss is probable and the amount can be estimated. Costs related to
environmental compliance are also accrued when it is probable a loss has been incurred and the amount of loss can be estimated.
E) Pensions and Other Post-retirement Plans
The Company accounts for its pension and other post-retirement plans using the recognition and disclosure provisions of SFAS No.158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires employers to recognize in their balance sheets the
overfunded or underfunded status of defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit
obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). The Company recognizes the change in the funded status of the plan in
the year in which the change occurs through Accumulated other comprehensive income. This Statement also requires plan assets and obligations to be measured as of the employers’
balance sheet date. The measurement provision of this Statement will be effective for years beginning after December 15, 2008, with early application encouraged. The Company has not
yet adopted the measurement provisions of this Statement.
As of November 30, 2007, included in Accumulated other comprehensive loss was unrecognized prior service costs credits of $0.7 million and unrecognized actuarial loss of $8.9
million. The estimated net loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated other comprehensive loss and included in pension expense
during 2008 are $2.6 million and $0.7 million, respectively. The estimated net gain and prior service cost for retiree medical plans that will be amortized from accumulated other
comprehensive loss and included in other post-retirement credits during 2008 are $2.5 million and $0.3 million, respectively.
The most significant elements in determining the Company’s pension expense are the expected return on plan assets and the discount rate. The assumed long-term rate of return on
assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. This produces the expected return
on plan assets that is included in pension (expense) income. The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset
gains (losses) affects the calculated value of plan assets and, ultimately, future pension (expense) income.
The Company recorded non-cash pension expense of $5.4 million in both 2007 and 2006. Pension expense is calculated using the discount rate, as determined below, used to
discount plan liabilities at the prior year measurement date. Thus, the rates of 6.15% and 5.4% were used to calculate the pension expense in 2007 and 2006, respectively. The Company
anticipates 2008 non-cash expense to be approximately $5.0 million. An increase or decrease of 25 basis points in the discount rate would decrease or increase expense on an annual
basis by approximately $0.5 million.
The Company determined the discount rate to be used to discount the plan liabilities at the plan’s measurement date, which was August 31, 2007. The discount rate reflects the
current rate at which the pension liabilities could be effectively settled at the measurement date. In estimating this rate, the Company considered rates of return on high quality, fixed-
income investments that receive one of the two highest ratings given by a recognized investment ratings agency. Changes in discount rates, as well as the net effect of other changes in
actuarial assumptions and experience, have been recognized in Accumulated other comprehensive (loss) income as prescribed by SFAS No. 158.
With the higher yields and risk environment in 2007, the Company increased the discount rate used to measure the defined benefit pension plan obligations to a discount rate of
6.55% from a discount rate of 6.15% in 2006. The measurement date of August 31, 2007 was used to determine this rate.
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as
well as the target allocation of the pension portfolio. This
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Table of Contents
resulted in the selection of a long-term rate of return on assets assumption of 8.0% for plan years 2007 and 2006. The measurement dates of August 31, 2007 and 2006 were used to
determine these rates. A 25 basis point change in the assumed rate of return for assets would increase or decrease the assets by approximately $0.5 million and would increase or
decrease pension expense by approximately $0.5 million.
Based on asset performance, interest rate and discount rate assumptions and current pension funding rules, the Company does not anticipate that a cash contribution to the pension
fund will be required prior to 2010. However, this funding analysis is highly sensitive to changes in these assumptions and such changes may accelerate or delay the requirement to make a
cash contribution.
Currently, the pension plan has a credit balance that will cover cash contribution requirements for the next two years. Factors that could alter the cash requirements and timing of any
such cash equivalents are:
•
•
•
Investment returns which differ materially from the Company’s 8.0% return assumption.
Significant changes in interest rates, affecting the discount rate.
Opportunities to reduce future cash requirements by accelerating contributions ahead of the minimum required schedule. By following certain strategies, smaller
contributions in the near term may prevent the need for larger contributions in the future. Some of those strategies might include, but are not limited to, contributions to
avoid Pension Benefit Guaranty Corporation variable premiums, and maintain funded status to avoid additional funding requirements under Section 412(I) of the Internal
Revenue Code. These types of contributions would allow the Company to manage the overall cash flow to the plan.
F) Tax Valuation Allowance
The Company has provided a full valuation allowance against its net deferred tax assets due to the uncertainty of realization of such assets. As of November 30, 2007, the Company
had approximately $85.3 million of net deferred tax assets primarily related to domestic loss carryforwards that expire by 2025, goodwill and indefinite lived intangible asset impairment
losses created as a result of the Company’s annual impairment test in 2004 and 2003, the cumulative effect of an accounting change effective December 1, 2001, a change in the
Company’s pension liabilities, and other temporary differences for which a full valuation allowance of $85.3 million has been provided. The Company provided a valuation allowance for its
deferred tax assets after having considered its history of cumulative losses since its spin-off from GenCorp.
G) Stock Based Employee Compensation
Prior to December 1, 2005, the Company elected to follow Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for the Company’s employee stock options. Under APB 25, because the exercise price of the stock option equaled the market price of the underlying stock on
the date of grant (intrinsic value method), no compensation expense was recognized.
Effective December 1, 2005, the Company adopted the fair value method of recording stock options as required by SFAS No. 123 (Revised), “Share-Based Payment” using the
modified prospective method. Under this method, compensation cost includes the portion of awards vested in the period for (1) all share-based payments granted prior to but not vested as
of December 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and (2) all share-based payments granted subsequent to
December 1, 2005, based on the grant date fair value.
While the Company regularly evaluates the use of share-based payments, its recent practice has been to issue fewer stock options than has been issued in the past, utilizing other
forms of incentives such as restricted stock, which are required to be expensed using the fair value method. See Note O to the Company’s Consolidated Financial Statements for a further
discussion of share-based payments.
H) Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as property, plant and equipment, and definite-lived
intangibles are reviewed for impairment whenever events or
28
Table of Contents
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying
amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell, and depreciation ceases. During 2006, the Company recorded impairment charges of $0.1 million.
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 November 30, 2007 reflects reserves for environmental
remediation efforts of $0.5 million.
Capital expenditures for projects related to environmental matters were $1.2 million in 2007, $0.5 million in 2006 and $0.4 million in 2005. During 2007, non-capital expenditures for
environmental compliance and protection totaled $5.1 million, all of which were for recurring costs associated with managing hazardous substances and pollution abatement in ongoing
operations. Similar non-capital expenditures were $4.7 million and $4.0 million in years 2006 and 2005, respectively. The Company anticipates that non-capital environmental expenditures
for the next several years will be consistent with historical expenditure levels.
Employee Matters
The Company employs 1,640 employees at offices, plants and other facilities located principally throughout the United States and the United Kingdom. Approximately 28%, or about
460, of the Company’s employees are covered by collective bargaining agreements. In February 2007, the Company and its Calhoun, Georgia bargaining unit employees ratified a new
three year contract agreement. In May 2007, the Company and its Columbus, Mississippi bargaining unit employees ratified a new three year contract agreement. Approximately 115
employees are covered by collective bargaining agreements set to expire in 2008. The Company would generally describe its relationship with employees as good.
New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109.” FIN 48 clarifies the
accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for years beginning after December 15, 2006. This Interpretation will be effective for the Company beginning December 1, 2007. The adoption of this
Interpretation is not expected to have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. This Statement is effective for years beginning after November 15, 2007. The adoption of this
Statement is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”
SFAS No. 159 provides companies with an option to measure, at specified election dates, financial instruments and certain other items at fair value that are not currently measured at fair
value. For those items for which the fair value option is elected, unrealized gains and losses will be recognized in earnings for each subsequent reporting period. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective for years beginning after November 15, 2007. The adoption of the Statement is not expected to have a material impact on the Company’s consolidated
financial statements.
29
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Forward Looking Statements
This Annual Report includes forward looking statements as defined by federal securities laws. Please refer to Item 1A. Risk Factors, beginning on page 8 of this Report which is
incorporated herein by reference.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on its long-term debt obligations. As described in Note L of the Company’s Consolidated Financial Statements,
the Company’s $150 Million Term Loan Credit Agreement (“Term Loan”), which matures in 2014, and Senior Secured Revolving Credit Facility (“Facility”), which matures in 2012, both
have variable interest rates. Borrowings under the Term Loan and the Facility were $149.2 million and $0.7 million, respectively, as of November 30, 2007. The Company has one fixed rate
interest rate swap agreement with a notional amount of $50 million, to convert a portion of its variable rate Term Loan to a fixed rate of 7.73%. The fair value of this swap was a loss of $2.5
million as of November 30, 2007. The weighted average effective interest rate of the Company’s outstanding debt was 7.5% as of November 30, 2007. A hypothetical increase or decrease
of 100 basis points would impact the Company’s interest expense by approximately $1.6 million. The Company does not enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company is subject to foreign currency exchange risk primarily due to the European wallcovering business. As disclosed in Note F, the Company has experienced an
accumulated gain of $8.2 million as of November 30, 2007 primarily due to the favorable currency conversion of the British Pound Sterling. 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.
Management’s Assessment of Internal Control Over Financial Reporting
Management of OMNOVA Solutions Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Under the supervision and with the participation of the Company’s management, including the chief executive officer and chief financial officer, the Company conducted an
assessment of the effectiveness of the Company’s internal control over financial reporting. Management has determined that the Company’s internal control over financial reporting is
effective as of November 30, 2007.
The effectiveness of the Company’s internal control over financial reporting as of November 30, 2007 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report, which is included herein.
30
Table of Contents
To the Board of Directors and Shareholders of OMNOVA Solutions Inc.:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited OMNOVA Solutions Inc.’s internal control over financial reporting as of November 30, 2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). OMNOVA Solutions Inc.’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report titled “Management’s
Assessment of Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, OMNOVA Solutions Inc. maintained, in all material respects, effective internal control over financial reporting as of November 30, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of November 30, 2007
and 2006 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended November 30, 2007 of
OMNOVA Solutions Inc. and our report dated January 22, 2008 expressed an unqualified opinion thereon.
Akron, Ohio
January 22, 2008
31
Table of Contents
Item 8.
Consolidated Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Management
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended November 30, 2007, 2006 and 2005
Consolidated Balance Sheets at November 30, 2007 and 2006
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended November 30, 2007, 2006 and 2005
Notes to the Consolidated Financial Statements
32
Page
Number
33
34
35
36
37
38
39
Table of Contents
To the Shareholders of OMNOVA Solutions Inc.:
REPORT OF MANAGEMENT
Management of OMNOVA Solutions Inc. is responsible for preparing the accompanying consolidated financial statements and for assuring their integrity and objectivity. These financial
statements were prepared in accordance with U.S. generally accepted accounting principles and fairly represent the transactions and financial condition of the Company in all material
respects. The financial statements include amounts that are based on management’s best estimates and judgments. The Company’s financial statements have been audited by Ernst &
Young LLP, an independent registered public accounting firm, who has been selected by the Audit Committee of the Board of Directors and approved by the shareholders. Management
has made available to Ernst & Young LLP all of the Company’s financial records and related data, internal audit reports, as well as the minutes of shareholders’ and directors’ meetings.
Management of the Company has established and maintains a system of internal accounting controls that is designed to provide reasonable assurance that assets are safeguarded,
transactions are properly recorded and executed in accordance with management’s authorization and the books and records accurately reflect the disposition of assets. The system of
internal controls includes appropriate division of responsibility. The Company maintains an internal audit department that independently assesses the effectiveness of the internal controls
through a program of internal audits.
The Audit Committee is composed of directors who are not officers or employees of the Company. It meets regularly with members of management, the internal auditors and
representatives of the independent registered public accounting firm to discuss the adequacy of the Company’s internal control over financial reporting, financial statements and the nature,
extent and results of the audit effort. Management reviews with the Audit Committee all of the Company’s significant accounting policies and assumptions affecting the results of operations.
Both the independent registered public accounting firm and internal auditors have access to the Audit Committee without the presence of management.
Kevin M. McMullen
Chairman, Chief Executive Officer and President
Michael E. Hicks
Senior Vice President and Chief Financial Officer
January 25, 2008
33
Table of Contents
To the Board of Directors and Shareholders of OMNOVA Solutions Inc.:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of OMNOVA Solutions Inc. as of November 30, 2007 and 2006, and the related consolidated statements of operations,
shareholders’ equity and cash flows for each of the three years in the period ended November 30, 2007. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OMNOVA Solutions Inc. at November 30, 2007 and
2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2007, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note A to the financial statements, effective December 1, 2005, the company changed its method of accounting for stock-based compensation. Also as discussed in Note B
to the financial statements, effective November 30, 2006, the Company changed its method of accounting for its employee benefit plans.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), OMNOVA Solutions Inc.’s internal control over financial
reporting as of November 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated January 22, 2008 expressed an unqualified opinion thereon.
Akron, Ohio
January 22, 2008
34
Table of Contents
OMNOVA SOLUTIONS INC.
Consolidated Statements of Operations
Net Sales
Costs and Expenses
Cost of products sold
Selling, general and administrative
Depreciation and amortization
Indefinite-lived trademark impairment
Fixed asset impairment
Restructuring and severance
Interest expense
Equity earnings in affiliates, net
Debt redemption expense
Other income, net
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued Operations, Net of Tax:
Income (loss) from operations
Gain on sale
Income from discontinued operations
Net Income (Loss)
Basic Income (Loss) Per Share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per share
Diluted Income (Loss) Per Share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per share
See notes to consolidated financial statements.
35
Years Ended November 30,
2007
2006
2005
(Dollars in millions, except per share data)
$
745.5
$
699.1
$
695.0
605.2
99.1
20.1
—
—
1.0
16.5
(1.2)
12.4
(.7)
549.2
105.6
20.2
1.0
.1
1.3
21.3
(2.3)
—
(.6)
752.4
695.8
(6.9)
.1
(7.0)
.3
—
.3
(6.7)
(.17)
.01
(.16)
(.17)
.01
(.16)
$
$
$
$
$
$
$
$
$
$
3.3
.1
3.2
(.1)
18.2
18.1
21.3
.08
.44
.52
.08
.43
.51
$
$
$
$
$
542.6
105.7
21.1
—
2.5
5.4
22.6
(.7)
—
(1.2)
698.0
(3.0)
(.3)
(2.7)
.9
—
.9
(1.8)
(.06)
.02
(.04)
(.06)
.02
(.04)
Table of Contents
OMNOVA SOLUTIONS INC.
Consolidated Balance Sheets
ASSETS:
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses
Deferred income taxes
Total Current Assets
Restricted cash
Property, plant and equipment, net
Trademarks and other intangible assets, net
Investments in affiliates
Prepaid pension asset
Deferred income taxes
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Current portion of long-term debt
Accounts payable
Accrued payroll and personal property taxes
Accrued interest
Deferred income taxes
Employee benefit obligations
Other current liabilities
Total Current Liabilities
Long-term debt
Postretirement benefits other than pensions
Deferred income taxes
Pension liability
Other liabilities
Total liabilities
Shareholders’ Equity
Preference stock—$1.00 par value; 15 million shares authorized; none outstanding
Common stock—$0.10 par value; 135 million shares authorized; 43.4 million and 43.1 million shares issued as of November 30, 2007
and 2006, respectively
Additional contributed capital
Retained deficit
Treasury stock at cost; 0.8 million and 1.1 million shares as of November 30, 2007 and 2006, respectively
Accumulated other comprehensive loss
Total Shareholders’ Equity
November 30,
2007
2006
(Dollars in millions, except per
share amounts)
$
12.6
102.2
30.6
3.1
—
148.5
—
135.8
4.2
22.2
9.8
1.7
4.2
$
26.4
94.4
33.4
3.3
.3
157.8
12.3
138.5
5.7
19.1
—
—
5.5
$
326.4
$
338.9
$
5.3
62.0
14.2
.1
1.7
3.3
5.2
91.8
144.6
11.0
—
2.4
11.3
261.1
—
4.3
314.9
(243.3)
(6.7)
(3.9)
65.3
$
—
58.2
14.2
9.3
—
5.1
6.7
93.5
165.0
17.1
.3
3.0
11.5
290.4
—
4.3
313.8
(236.6)
(8.4)
(24.6)
48.5
Total Liabilities and Shareholders’ Equity
$
326.4
$
338.9
See notes to consolidated financial statements.
36
Table of Contents
(Dollars in millions)
2005
Balance November 30, 2004
Net loss
Cumulative translation adjustment
Defined benefit pension plans
Total comprehensive loss
OMNOVA SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity
For the Years Ended November 30, 2007, 2006 and 2005
Common
Stock
Additional
Contributed
Capital
Retained
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
(Deficit)
Total
Comprehensive
Income (Loss)
$
4.2
$
310.9
$
(256.2)
(1.8)
$
(11.4)
$
3.3
$
(4.1)
(60.4)
Exercise of stock options and other
Common stock issuance
1.3
.1
.1
1.4
Balance November 30, 2005
$
4.3
$
312.2
$
(257.9)
$
(10.0)
$
(61.2)
$
(12.6)
2006
Net income
Cumulative translation adjustment
Defined benefit pension plans
Total comprehensive income
21.3
Exercise of stock options and other
Common stock issuance
Adjustment to initially apply SFAS No. 158
1.6
1.6
5.5
60.9
(29.8)
21.3
5.5
60.9
1.6
1.6
(29.8)
Balance November 30, 2006
$
4.3
$
313.8
$
(236.6)
$
(8.4)
$
(24.6)
$
48.5
2007
Net loss
Cumulative translation adjustment
Unrecognized loss on interest rate swap
Defined benefit pension plans
Prior service costs
Net actuarial (loss) gain
Total comprehensive income
Exercise of stock options and other
Common stock issuance
(6.7)
3.4
(2.5)
3.5
16.3
1.1
1.7
(6.7)
3.4
(2.5)
3.5
16.3
1.1
1.7
Balance November 30, 2007
$
4.3
$
314.9
$
(243.3)
$
(6.7)
$
(3.9)
$
65.3
See notes to consolidated financial statements.
37
50.8
(1.8)
(4.1)
(60.4)
1.4
1.5
$
$
$
$
$
$
(1.8)
(4.1)
(60.4)
(66.3)
21.3
5.5
60.9
87.7
(6.7)
3.4
(2.5)
3.5
16.3
14.0
Table of Contents
OMNOVA SOLUTIONS INC.
Consolidated Statements of Cash Flows
Operating Activities
Net (loss) income
Income from discontinued operations
(Loss) income from continuing operations
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity earnings in affiliates
Loss (gain) on sale of fixed assets
Depreciation and amortization
Debt redemption expense
Write-down of indefinite lived trademarks
Restructuring and severance and write-down of fixed assets
Non-cash stock compensation expense
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Current liabilities
Other non-current assets
Other long-term liabilities
Discontinued operations
Net Cash Provided By Operating Activities
Investing Activities
Capital expenditures
Proceeds from asset dispositions and business sold
Dividends received from equity affiliates
Use of (investment in) restricted cash
Discontinued operations
Net Cash Used By Investing Activities
Financing Activities
Proceeds from borrowings
Repayment of debt obligations
Short-term debt proceeds (payments), net
Cash paid for debt redemption and refinancing costs
Other financing activities
Net Cash Used By Financing Activities
Effect of exchange rate changes on cash
Net (Decrease) Increase In Cash and Cash Equivalents
Cash and cash equivalents at beginning of period
Years Ended November 30,
2007
2006
2005
(Dollars in millions)
$
(6.7)
(.3)
$
21.3
(18.1)
$
(7.0)
$
3.2
$
$
(1.2)
(1.0)
20.1
12.4
—
1.0
.9
1.1
(7.6)
2.8
.3
(8.3)
.8
(1.3)
(.3)
(2.3)
—
20.2
—
1.0
1.4
.8
(1.4)
(3.9)
4.2
(.1)
(13.5)
8.3
(7.0)
11.2
12.7
22.1
(16.2)
1.5
—
12.3
—
(13.0)
25.0
.5
(12.3)
(.8)
(1.8)
(.9)
(2.7)
(.7)
(.5)
21.1
—
—
4.5
1.0
—
(9.0)
8.0
(.5)
(9.3)
2.5
(2.7)
.8
12.5
(12.4)
.3
—
—
(.8)
(2.4)
(.6)
(12.9)
689.3
(708.1)
3.8
(12.0)
2.6
(24.4)
.3
(13.8)
26.4
687.1
(698.4)
(.1)
—
1.5
(9.9)
4.9
16.5
9.9
770.9
(775.1)
(.2)
—
.4
(4.0)
(.7)
(5.1)
15.0
Cash and Cash Equivalents at End of Period
$
12.6
$
26.4
$
9.9
See notes to consolidated financial statements.
38
Table of Contents
Note A—Significant Accounting Policies
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Basis of Consolidation—The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company uses the equity method of
accounting for its three Asian joint ventures, CPPC–Decorative Products Co., Ltd., CG – OMNOVA Decorative Products (Shanghai) Co., Ltd. and Beston OMNOVA Plastics (Taicang) Co.,
Ltd., (collectively the “Asian Joint Ventures”) in which it holds a 50.1% ownership interest, due to contractual limitations that grant substantive participating rights to the minority partner.
Each of the Company’s Asian Joint Ventures report results of operations to the Company on a one-month lag. Therefore, included in the Company’s annual reported equity earnings
in affiliates are the Company’s proportionate share of the operating results of the Asian Joint Ventures for the twelve month period ending October 31.
Reclassifications—Certain prior year’s amounts have been reclassified to conform to current year presentation. In addition, the results of operations and cash flows of the Building
Products business, a previously reportable operating segment, have been classified as discontinued operations for all periods presented. Unless otherwise indicated, all disclosures in the
notes to the consolidated financial statements relate to the continuing operations of the Company.
Use of Estimates—The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition—Sales must meet the following criteria in order to be recognized as revenue: 1) persuasive evidence of an arrangement exists; 2) product must be shipped to
customer, thereby assuring delivery, whereby shipment results in the transfer of ownership risk to the customer; 3) an established sales price has been set with the customer; 4) collection
of the sale revenue from the customer is reasonably assured; and 5) no contingencies exist. The Company estimates and records provisions for quantity rebates, sales returns and
allowances in the period the revenue is recognized, based upon its experience. These items are included as a reduction in net sales.
Freight Costs—The Company reflects the cost of shipping its products to customers as cost of products sold. Customer reimbursements for freight are not significant.
Environmental Costs—The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. The
Company accrues for costs associated with environmental remediation when it becomes probable that a liability has been incurred.
Research and Development Expense—Research and development costs, which were $9.1 million in 2007, $9.5 million in 2006 and $11.2 million in 2005, are charged to expense
as incurred.
Cash and Cash Equivalents—The Company considers all highly liquid instruments with maturities of 90 days or less as cash equivalents.
Restricted Cash—As a result of the Company’s sale of its Building Products business during the fourth quarter of 2006, which is described in Note D, the Company placed $12.3
million of the proceeds from the sale into a restricted long-term cash account for the benefit of the Company’s bondholders, which represents the fair value of the property, plant and
equipment of the sold business that was previously pledged as collateral under the Company’s borrowing arrangements. The Company utilized this restricted cash and related interest in
connection with its redemption and refinancing in May and June 2007.
39
Table of Contents
Note A—Significant Accounting Policies (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Fair Value of Financial Instruments—The estimated fair values of the Company’s financial instruments as of November 30, 2007 and 2006 are as follows:
Cash and cash equivalents
Restricted cash
Short-term debt
Long-term debt
Interest rate swap
2007
2006
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
$
$
$
$
12.6
—
5.3
144.6
2.5
$
$
$
$
$
12.6
—
5.3
144.6
2.5
$
$
$
$
$
26.4
12.3
—
165.0
—
$
$
$
$
$
26.4
12.3
—
176.6
—
The carrying value of the Company’s cash equivalents approximates fair value due to the short term maturity of such instruments. The senior secured revolving credit facility and the
$150 Million Term Loan Credit Agreement each bears interest at variable rates and therefore its carrying value approximates its fair value. As of November 30, 2006, the estimated fair
value of the $165 Million 11 1 /4% Senior Secured Note was based on quoted market rates. Interest rate swaps are recorded at estimated fair values based on settlement amounts.
Interest Rate Swap—The Company recognizes derivative instruments as either an asset or a liability at fair value. For a cash flow hedge, the effective portion of the change in fair
value of the derivative is recognized as an asset or liability with a corresponding amount in Accumulated other comprehensive income (loss). Amounts in Accumulated other comprehensive
income (loss) are recognized in earnings when the underlying hedged transaction occurs. Ineffectiveness is measured by comparing the present value of the cumulative change in the
expected future cash flows on the variable leg of the swap and the present value of the cumulative change in the expected future interest cash flows on the debt. Any ineffective portion of a
cash flow hedge is recognized in earnings immediately. There was no ineffectiveness on the Company’s interest rate swap during 2007 because the terms of the interest rate swap were
identical to the hedged portion of the Term Loan.
Currently, the Company only hedges a portion of its variable rate debt using an interest rate swap. The net interest paid or received on interest rate swaps is recognized as interest
expense or income.
The Company does not enter into derivative instruments for trading or speculative purposes.
Accounts Receivable Allowance—The Company’s policy is to identify all specific customers that are considered doubtful of collection based upon the customer’s financial
condition, payment history, credit rating and other relevant factors, and those accounts that have been turned over for collection and to reserve the portion of such accounts receivable for
which collection does not appear likely. If the financial condition of the Company’s customers were to deteriorate, resulting in an inability to make payments, additional allowances may be
required.
Inventories—Inventories are stated at the lower of cost or market. All U.S. based inventory is valued using the last-in, first-out (“LIFO”) method. The Company believes the LIFO
method results in a better matching of costs and revenues. The remaining portion of inventories, which are located outside of the U.S., are valued using the first-in, first-out (“FIFO”)
method. Inventory costs include direct overhead, freight and duty for purchased products.
The Company’s policy is to maintain an inventory obsolescence reserve based upon specifically identified, discontinued or obsolete items and a percentage of quantities on hand
compared with historical and forecasted usage and sales levels. The policy has been applied on a consistent basis for all years presented. A sudden and unexpected change in design
trends and/or preferences for patterns, colors and/or material could reduce the rate of inventory turnover and require the
40
Table of Contents
Note A—Significant Accounting Policies (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Company to increase its reserve for obsolescence. The reserve for inventory obsolescence, which applies primarily to our Decorative Products segment, was approximately $9.5 million
and $9.9 million at November 30, 2007 and 2006, respectively.
Long-Lived Assets—Property, plant and equipment are recorded at cost. Refurbishment costs are capitalized in the property accounts, whereas, ordinary maintenance and repair
costs are expensed as incurred. Depreciation is computed principally using the straight-line method. Depreciable lives on buildings and improvements and machinery and equipment range
from 10 to 40 years and 3 to 20 years, respectively. Leasehold improvements are depreciated over the shorter of the lease term, including any expected renewal periods or the estimated
useful life of the improvement.
Identifiable intangible assets, such as patents, trademarks and licenses, are recorded at cost or when acquired as part of a business combination at estimated fair value. Intangible
assets with finite lives are amortized over their estimated useful lives using the straight-line method over periods ranging from 10 to 30 years. Accumulated amortization of identifiable
intangible assets at November 30, 2007 and 2006 was $14.1 million and $12.6 million, respectively.
Impairment of other long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset or related group of assets may not be
recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized at that time to reduce the asset to the lower of
its fair value or its net book value.
Asset Retirement Obligations—The fair value of an asset retirement obligation is recorded when the Company has an unconditional legal obligation to perform an asset retirement
activity and the amount of the obligation can be reasonably estimated. In assessing asset retirement obligations, the Company reviews the expected settlement dates or a range of
estimated settlement dates, the expected method of settlement of the obligation and other factors pertinent to the obligations. As of November 30, 2007, the Company did not have any
material asset retirement obligations.
Foreign Currency Translation—The financial position and results of operations of the Company’s foreign subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of operations denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect at year-end, while revenues and expenses are
translated at the weighted average exchange rates for the year. The resulting translation gains and losses on assets and liabilities are recorded in Accumulated other comprehensive
income (loss), and are not included in operations until realized through sale or liquidation of the investment.
Income Taxes—Deferred income taxes are provided for temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
Stock-Based Compensation—Effective December 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 123(revised) using the modified prospective method. Under this method, compensation cost includes the portion of awards vested in the period for (1) all share-based payments
granted prior to, but not vested as of December 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and (2) all share-based
payments granted subsequent to December 1, 2005, based on the grant date fair value.
Prior to December 1, 2005, the Company elected to follow the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the stock options equaled the market price of the
underlying stock on the date of grant (intrinsic value method), no compensation expense was recognized.
41
Table of Contents
Note A—Significant Accounting Policies (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Had the Company used the fair value based accounting method for share-based compensation expense for 2005, the Company’s consolidated pro forma net loss and net loss per
share would have been as follows:
Net loss—as reported
Add: Total share-based compensation expense, included in reported net loss, net of related tax effects
Deduct: Total share-based compensation expense determined under fair-value based method for all rewards, net of related tax
effects
Pro forma net loss
Basic and diluted net loss per share, as reported
Proforma basic and diluted net loss per share
2005
(Dollars in millions, except
per share data)
$
$
$
$
(1.8)
1.0
(2.4)
(3.2)
(.04)
(.08)
New Accounting Pronouncements—In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes–an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006. This Interpretation will be
effective for the Company beginning December 1, 2007. The adoption of this Interpretation is not expected to have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement is effective for years beginning after November 15, 2007. The adoption of the Statement is not expected to have a material
impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”
SFAS No. 159 provides companies with an option to measure, at specified election dates, financial instruments and certain other items at fair value that are not currently measured at fair
value. For those items for which the fair value option is elected, unrealized gains and losses will be recognized in earnings for each subsequent reporting period. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective for years beginning after November 15, 2007. The adoption of the Statement is not expected to have a material impact on the Company’s consolidated
financial statements.
Note B—Adoption of SFAS No. 158
Effective November 30, 2006, the Company adopted the recognition provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans–an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires employers to recognize in their balance sheets the overfunded or underfunded status of
defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit obligation for pension plans and the
accumulated post-retirement benefit obligation for other post-retirement plans). Employers must recognize the change in the funded status of the plan in the year in which the change
occurs through other comprehensive income. This Statement also requires plan assets and obligations to be measured as of the employer’s balance sheet date. The measurement
provision of this Statement will be
42
Table of Contents
Note B—Adoption of SFAS No. 158 (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
effective for years beginning after December 15, 2008, with early application encouraged. The Company has not yet adopted the measurement provisions of this Statement and is in the
process of determining the impact of the adoption on the Company’s consolidated financial statements.
Prior to the adoption of the recognition provisions of SFAS No. 158, the Company accounted for its defined benefit post-retirement plans under SFAS No. 87, “Employers Accounting
for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” SFAS No. 87 required that a liability (minimum pension liability) be recorded
when the accumulated benefit obligation (ABO) liability exceeded the fair value of plan assets. The transition adjustment was recorded as a non-cash charge to Accumulated other
comprehensive income in shareholders’ equity. SFAS No. 106 required that the liability recorded should represent the actuarial present value of all future benefits attributable to an
employees’ service rendered to date. Under both SFAS No. 87 and No. 106, changes in the funded status were not immediately recognized, rather they were deferred and recognized
ratably over future periods. Upon adoption of the recognition provisions of SFAS No. 158, the Company recognized the amounts of prior changes in the funded status of its post-retirement
benefit plans through Accumulated other comprehensive income. As a result, the Company recognized the following adjustments in individual line items of its Consolidated Balance Sheet
as of November 30, 2006:
Prepaid pension asset
Postretirement benefits other than pension
Pension liability
Total liabilities
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Prior
to
Applic
ation o
f
SFAS
No.
158
$ 53.8
$ 45.5
1.8
$
$ 314.8
5.2
$
$ 78.3
Effect of
Adopting
SFAS No. 158
As
Reported at
November 30, 2006
(Dollars in millions)
$
$
$
$
$
$
(53.8)
(25.6)
1.2
(24.4)
(29.8)
(29.8)
$
$
$
$
$
$
—
19.9
3.0
290.4
(24.6)
48.5
The adoption of the recognition provisions of SFAS No. 158 had no effect on the Company’s consolidated statement of operations and cash flows for the year ended November 30,
2006, or for any prior period presented, did not affect any financial covenants, and is not expected to affect the Company’s operating results in future periods.
Note C—Restructuring and Severance
The following table is a summary of restructuring and severance charges for 2007, 2006 and 2005:
Severance expense
Fixed asset write-off
Other asset write-off
Other exit costs
Debt settlement and asset sales
2007
2006
2005
(Dollars in millions)
$
1.0
—
—
—
—
$
1.0
—
—
.3
—
$
3.4
.4
2.8
.5
(1.2)
$
1.0
$
1.3
$
5.9
In 2007, the Company’s Decorative Products segment recorded $0.8 million of severance charges and Corporate recorded $0.2 million of severance charges, all which were related
to workforce reduction initiatives. The Company terminated 15 employees in connection with these workforce reductions. The Company expects payments related to such charges to be
completed during 2008.
43
Table of Contents
Note C—Restructuring and Severance (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
In 2006, the Company’s Decorative Products segment recorded $0.7 million of restructuring and severance charges relating to the closure of one of its European wallcovering sales
facility and domestic workforce reduction initiatives. Also in 2006, the Company’s Performance Chemicals segment recognized $0.4 million and Corporate headquarters recognized $0.2
million of severance charges relating to workforce reduction initiatives. The Company terminated 29 employees in connection with these workforce reductions. Payments related to such
severance charges were completed during 2007.
In connection with the appointment of a new distributor for its Genon® brand of commercial wallcoverings during the first quarter of 2005, the Company substantially completed the
closure of its wallcovering distribution facility in Randolph, Massachusetts. In the first quarter of 2005, the Company incurred disposal costs of $3.7 million for inventories, sample books,
other assets and related fixed assets not transferred to the new distributor or redeployed within the Company and $1.2 million for severance costs covering 65 employees, offset by $1.2
million resulting from the settlement of certain debt obligations relating to this business and the sale of the Guard ® brand of commercial wallcovering to a third party. Of the total $3.7
million charge for this restructuring effort, $0.5 million of inventory related write-downs were classified as cost of products sold, with the balance classified as restructuring and severance in
the Company’s Consolidated Statements of Operations.
Also during the first quarter of 2005, the Decorative Products segment recorded an additional $0.3 million of severance related to other workforce reduction initiatives. The
Performance Chemicals segment recorded $0.3 million of severance resulting primarily from the consolidation of job positions. Both restructurings were designed to consolidate operations
and reduce costs. As a result of these restructurings, the Company terminated 10 employees. These workforce reduction programs were complete as of February 28, 2005.
During the second quarter of 2005, in connection with ongoing efforts to reduce costs, the Company implemented a reduction in force affecting approximately 30 employees across
the Company and recorded a charge of approximately $1.0 million for severance and related costs.
During the third quarter of 2005, the Decorative Products segment recorded $0.6 million of restructuring and severance costs relating to the closure of a design facility in New Jersey
and workforce reductions in the U.K. As a result of these restructurings, the Company terminated 21 employees. Payments related to these charges were substantially completed as of
November 30, 2005.
The following table summarizes the Company’s liabilities related to restructuring and severance activities:
Performance Chemicals
Decorative Products
Corporate
Total
Nov
emb
er 3
0,
2006
$ .4
.5
.1
$ 1.0
2007
Provision
Payments
November 30,
2007
(Dollars in millions)
$
.4
1.0
.3
—
.8
.2
1.0
$
1.7
$
$
$
$
—
.3
—
.3
In addition to the amounts above, during 2006 the Company recognized $1.2 million of severance and other exit costs relating to the sold Building Products segment that were
classified in discontinued operations. These payments were completed by the end of 2007.
44
Table of Contents
Note D—Discontinued Operations
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
On September 27, 2006, the Company sold substantially all of the assets and liabilities of the Building Products business to BFS Diversified Products, LLC, for $25.9 million in cash
resulting in a gain of $18.2 million. No income taxes were provided due to the utilization of the Company’s net operating loss carryforwards. The Company retained $10.5 million of Building
Products trade accounts receivable, all of which were collected as of November 30, 2006.
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” the results of operations and cash flows of the Building
Products business for all periods presented have been reported as discontinued operations. This transaction allowed the Company to focus its resources on its strategic product lines with
strong market positions and provided the Company with flexibility to grow its remaining segments.
The results of operations for the Building Products business reported as discontinued operations were:
2007
2006
2005
Net sales
Net earnings (loss) from discontinued operations
$
$
(Dollars in millions)
—
.3
$ 93.4
(.1)
$
$ 115.1
.9
$
During 2007, the Company completed all obligations associated with the sale of the Building Products business, including the payment of all exit costs. As a result, the Company
reversed $0.3 million of estimated exit costs in 2007.
Note E—Earnings Per Share
A reconciliation of the numerator and denominator used in the basic and diluted earnings per share computations is as follows:
Numerator
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Denominator
Denominator for basic income (loss) per share—weighted average shares outstanding
Effect of dilutive employee stock options
Years Ended November 30,
2007
2006
2005
(Dollars in millions, except per
share data)
$
$
(7.0)
.3
$
3.2
18.1
(6.7)
$
21.3
$
$
(2.7)
.9
(1.8)
(Shares in thousands)
41,799
—
41,322
298
40,707
—
Denominator for diluted income (loss) per share—adjusted weighted average shares
41,799
41,620
40,707
Basic Income (Loss) Per Share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
45
Years Ended November 30,
2007
2006
2005
$
$
(.17)
.01
$
.08
.44
(.16)
$
.52
$
$
(.06)
.02
(.04)
Table of Contents
Note E—Earnings Per Share (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Diluted Income (Loss) Per Share:
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Years Ended November 30,
2007
2006
2005
$
(.17)
.01
$
.08
.43
$
(.06)
.02
$
(.16)
$
.51
$
(.04)
Options to purchase common stock and unearned restricted stock of the Company that were anti-dilutive of 2.8 million, 3.4 million and 5.5 million shares during 2007, 2006 and 2005,
respectively, were not included in the computation of dilutive per share amounts.
Note F—Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss are as follows:
Foreign currency translation adjustments
Unrecognized loss on interest rate swap
Employee benefit plans
Accumulated comprehensive loss
Years Ended November 30,
20
07
2006
2005
(Dollars in millions)
$ 8.2
(2.5)
(9.6)
$
4.9
—
(29.5)
$
(.6)
—
(60.6)
$ (3.9)
$
(24.6)
$
(61.2)
The amounts included in Accumulated other comprehensive loss during 2007 and 2006 relating to the Company’s employee benefit plans were as follows:
2007
Net Actuarial (Loss) Gain
Net actuarial gain incurred during the period
Amortization of net actuarial (loss) gain included in net periodic pension expense
Net change in net actuarial gain
Prior Service Cost
Prior service costs incurred during the period
Amortization of prior service costs included in net periodic pension expense
Net change in prior service costs
2006
Net actuarial (loss) gain
Amount recognized upon the adoption of SFAS No. 158
Prior service cost
Amount recognized upon the adoption of SFAS No. 158
Pension
Plans
Health Care
Plans
Total
(Dollars in millions)
$
11.1
3.6
$
4.1
(2.5)
$ 15.2
1.1
$
14.7
$
1.6
$ 16.3
$
$
—
.8
$
2.9
(.2)
$
2.9
.6
.8
$
2.7
$
3.5
$
(51.5)
$
26.3
$ (25.2)
$
(3.6)
$
(.7)
$ (4.3)
In 2006, the fair value of plan assets of the Company’s funded defined benefit plan exceeded the accumulated benefit obligation, and accordingly, the Company reversed its
minimum pension liability of $0.3 million. Additionally, as of
46
Table of Contents
Note F—Accumulated Other Comprehensive Loss (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
November 30, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158 as described in Note B. As a result of adopting SFAS No. 158, the Company
recognized in its balance sheet the underfunded status of its defined benefit plans, measured as the difference between the fair value of plan assets and the benefit obligation (the
projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). As a result, as of November 30, 2006, the Company
recognized liabilities of $3.0 million for its defined benefit pension plans and $19.9 million for its retiree health care plan and also recognized in Accumulated other comprehensive loss a net
actuarial loss of $25.2 million and prior service costs of $4.3 million. The net difference between these liabilities and assets and liabilities previously recorded, approximately $29.8 million,
was charged to Accumulated other comprehensive loss as required by SFAS No. 158.
Note G—Income Taxes
Income Tax Expense (Benefit)
Current
U.S. federal
Foreign
Deferred
U.S. federal
State and local
Foreign
Income Tax Expense (Benefit)
Effective Income Tax Rate
Statutory federal income tax rate
Unrecognized net operating loss
Non-deductible goodwill
Foreign taxes
Expected refund for amended return
Other, net
Effective Income Tax Rate
Years Ended November 30,
2007
2006
2005
(Dollars in millions)
$
$
—
.1
.1
—
—
—
—
$
$
—
.1
.1
—
—
—
—
$
$
(.3)
—
(.3)
—
—
—
—
$
.1
$
.1
$
(.3)
Years Ended November 30,
2007
2006
2005
35.0%
(39.6)
(.2)
4.1
—
—
35.0%
(25.0)
.5
(8.3)
—
—
35.0%
(49.8)
(.8)
13.3
16.1
—
N/A
2.2%
13.8%
47
Table of Contents
Note G—Income Taxes (Continued)
Deferred Taxes
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Accrued estimated costs
Goodwill and intangible assets
Depreciation
Pension
NOL’s and other carryforwards
Postretirement employee benefits
Other
Valuation allowance
Deferred Taxes
November 30,
2007
2006
Assets
Liabilities
Assets
Liabilities
$
15.3
31.2
—
—
54.2
5.1
—
(85.3)
$
(Dollars in millions)
—
—
15.1
4.2
—
—
1.2
—
$
17.1
36.5
—
—
47.5
8.2
—
(91.8)
$
—
—
17.4
—
—
—
.1
—
$
20.5
$
20.5
$
17.5
$
17.5
As of November 30, 2007, the Company had approximately $133.0 million of domestic federal net operating losses (NOL’s) and $182.6 million of state and local NOL’s with
carryforward periods of 20 years and 5 to 20 years, respectively. The majority of the federal and state and local NOL’s expire in the years 2020 through 2028. The U.S. domestic pretax
income (loss) was $(6.6) million, $21.3 million and $(0.4) million in 2007, 2006 and 2005, respectively. As of November 30, 2007, the Company had approximately $21.3 million of foreign
NOL’s with an indefinite carryforward period. Pretax income (loss) of foreign subsidiaries was $(0.4) million, $2.2 million and $2.4 million in 2007, 2006 and 2005, respectively. No cash was
paid during 2007 and 2006 for income taxes. The Company received net cash refunds for income taxes in 2005 of $0.1 million primarily related to NOL carrybacks from foreign operations.
Due to the Company’s history of losses and uncertainties associated with predicting future taxable income, the Company provided a valuation allowance against its net deferred tax
assets due to the uncertainty of recovery of such assets. The net increase (decrease) in the valuation allowance was $(6.5) million, $(20.4) million and $22.0 million in 2007, 2006 and
2005, respectively. Undistributed earnings of foreign equity affiliates was $5.7 million as of November 30, 2007.
Note H—Accounts Receivable
The Company’s accounts receivable are generally unsecured and are not backed by collateral from its customers. No one customer represented more than 10% of the Company’s
net trade receivables at November 30, 2007 and 2006. The allowance for doubtful accounts was $1.6 million and $2.1 million at November 30, 2007 and 2006, respectively. Write-offs of
uncollectible accounts receivable totaled $0.5 million in 2007, $0.1 million in 2006 and $2.0 million in 2005. The provision for bad debts totaled less than $0.1 million, $0.4 million and $1.2
million in 2007, 2006 and 2005, respectively.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Table of Contents
Note I—Inventories
Raw materials and supplies
Work-in-process
Finished products
Approximate replacement costs of inventories
LIFO inventory reserve
Other reserves
Inventories
November 30,
2007
2006
(Dollars in millions)
$
16.6
2.2
44.5
$
18.1
2.8
46.4
63.3
(23.2)
(9.5)
67.3
(24.0)
(9.9)
$
30.6
$
33.4
Inventories valued using the LIFO method represented approximately $45.0 million or 70% and $49.6 million or 74% of inventories at November 30, 2007 and 2006, respectively.
During 2007, 2006 and 2005, inventory quantities declined resulting in liquidation of LIFO inventory layers carried at lower cost prevailing in prior years compared to the cost of current year
purchases. The effect of the liquidation decreased cost of products sold by $4.5 million, $6.0 million and $5.8 million in 2007, 2006 and 2005, respectively.
Note J—Property, Plant and Equipment, Net
Land
Building and improvements
Machinery and equipment
Construction in progress
Accumulated depreciation
Property, Plant and Equipment, Net
November 30,
2007
2006
(Dollars in millions)
$
8.8
87.8
349.9
10.4
$
8.8
87.4
344.4
7.6
456.9
(321.1)
448.2
(309.7)
$ 135.8
$ 138.5
Depreciation expense was $18.6 million, $18.6 million and $19.5 million in 2007, 2006 and 2005, respectively. Included in depreciation and amortization expense is $14.7 million,
$14.7 million and $15.5 million in 2007, 2006 and 2005, respectively, related to depreciation of manufacturing facilities and equipment.
Included in other income, net for 2007 is a gain of $0.7 million on the sale of an office facility in South Carolina.
Asset impairment charges for 2006 were $0.1 million for an idle building which was demolished at the Company’s Jeannette, Pennsylvania facility. Asset impairment charges for 2005
were $2.5 million for the idling of certain production assets at the Company’s Jeannette, Pennsylvania and Mogadore, Ohio facilities. Due to volume decreases during 2005 in the
Company’s base film business and the relocation of certain product lines to other Company facilities, the Company idled one of its calendering lines at its Jeannette, Pennsylvania facility.
The Company’s Performance Chemicals segment’s ongoing improvement in its manufacturing processes, increases in system-wide production capacity and an environment of high energy
costs led to lower cost solutions in the manufacturing and delivering of its styrene-butadiene products necessitating the write-off in 2005 of certain manufacturing assets at its Mogadore,
Ohio facility.
As of November 30, 2007 and 2006, the Company had $3.9 million and $3.3 million, respectively, of unamortized software costs included in machinery and equipment, primarily
related to an Enterprise Resource Program (ERP) system, which the Company began implementing during 2005. The Company is amortizing these costs over five years.
49
Table of Contents
Note K—Other Intangible Assets
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
During the fourth quarter of 2006, the Company determined that the Decorative Products indefinite lived trademark was fully impaired and recognized an impairment charge of $1.0
million. As of November 30, 2007, the Company had no indefinite lived intangible assets or goodwill.
The following table summarizes finite lived intangible assets as of November 30, 2007 and 2006:
Finite lived intangible assets
Patents
Trademarks
Technical know-how
Other
November 30, 2007
November 30, 2006
Gross
Carryi
ng
Net
Carry
ing
Gross
Carryi
ng
Amou
Amou
Amou
(Dollars in millions)
Net
Carrying
Amount
$
7.9
5.9
2.6
1.9
$ 1.6
.7
1.7
.2
$
7.9
5.9
2.6
1.9
$
2.3
1.3
1.8
.3
$ 18.3
$ 4.2
$ 18.3
$
5.7
Amortization expense for finite lived intangible assets subject to amortization was $1.5 million, $1.6 million and $1.6 million for the years ended November 30, 2007, 2006 and 2005,
respectively, and is estimated to be approximately $1.5 million in 2008, decreasing to $0.1 million in 2012.
Note L—Long-Term Debt and Credit Lines
On May 22, 2007, the Company entered into a $150 Million Term Loan Credit Agreement due May 2014. The Term Loan carries a variable interest rate based on, at the Company’s
option, either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base interest rate is a fluctuating rate equal to the higher of the Prime Rate
or the sum of the Federal Funds Effective Rate plus 0.50%. The applicable margin for the alternate base rate is 1.50%. The eurodollar rate is a periodic fixed rate equal to the London Inter
Bank Offered Rate (“LIBOR”). The applicable margin for the eurodollar rate is 2.50%. Annual principal payments consist of $1.5 million, due in quarterly installments, and annual excess
free cash flow payments as defined in the Term Loan agreement, with any remaining balance to be paid May 2014. Required principal payments of $0.8 million were paid during 2007. An
estimated annual excess cash payment of $3.8 million is required to be paid by the Company by the end of February 2008. The Company can prepay any amount at any time without
penalty upon proper notice and subject to a minimum dollar requirement. Prepayments will be applied towards any required annual excess free cash flow payment. The Term Loan is
secured by all real property and equipment of the Company’s domestic facilities and stock and equity investments of the Company’s non-domestic subsidiaries. The Term Loan contains
affirmative and negative covenants, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. The Term Loan requires the
Company to maintain a net leverage ratio of less than 5.5 to 1. At November 30, 2007, the Company was in compliance with this requirement with a ratio of 2.9 to 1. The Term Loan also
requires the Company to maintain an interest rate swap of at least 1/3 of the outstanding principle balance. Additionally, the Term Loan provides for additional borrowings of up to $75
million, provided that certain requirements are met including an interest coverage ratio and a senior secured leverage ratio. The Company has not utilized these additional borrowings as of
November 30, 2007.
Proceeds of the Term Loan, along with cash, restricted cash and other resources of the Company, were used to redeem the Company’s $165 Million 11 1 /4% Senior Secured Notes
(“Notes”). In connection with the redemption of the Notes, the Company paid $9.8 million in premium and tender fees. Additionally, the Company wrote off $2.6 million of unamortized debt
issuance costs which were being amortized over the term of the Notes.
50
Table of Contents
Note L—Long-Term Debt and Credit Lines (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
On May 31, 2007, the Company entered into a 5 year fixed rate interest rate swap agreement totaling $50 million to convert a portion of the outstanding Term Loan from variable to
fixed rates. Under this agreement, the Company will pay a fixed rate of 7.73% and receive a variable rate based on LIBOR plus a margin of 2.50%. The variable rates on the interest rate
swap and $50 million of the Term Loan are reset every three months on the same base rate and same date, at which time the interest will be settled and will be recognized as adjustments
to interest expense. This swap agreement is designated as a cash flow hedge, and as such, any resulting gain or loss on the fair value of the derivative instrument will be recognized in
Accumulated other comprehensive income, until it is realized. The fair value of the swap as of November 30, 2007 was a loss of $2.5 million, with a corresponding adjustment to other
liabilities. The effective interest rate for the Term Loan in 2007 was 8.3%. There was no ineffectiveness on the interest rate swap recognized during 2007.
In connection with the Term Loan, on May 22, 2007 the Company amended its Senior Secured Revolving Credit Facility (“Facility”). The Facility was increased to $80 million from
$72 million and extended until May 2012. The Facility is secured by domestic accounts receivable, inventory (collectively the “Eligible Borrowing Base”) and intangible assets. Availability
under the Facility will fluctuate depending on the Eligible Borrowing Base and is determined by applying customary advance rates to the Eligible Borrowing Base. The Facility includes a
$15 million sublimit for the issuance of commercial and standby letters of credit and a $10 million sublimit for swingline loans. The Facility contains affirmative and negative covenants,
similar to the Term Loan, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. If the average excess availability of the
Facility falls below $20 million, the Company must maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement. The Company may request an increase in
available borrowings under the Facility of up to $20 million (for a maximum of $100 million) upon satisfaction of certain requirements. The Company has not utilized these additional
available borrowings as of November 30, 2007.
Advances under the Facility bear interest, at the Company’s option, at either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base
interest rate is a fluctuating rate equal to the higher of the Prime Rate or the sum of the Federal Funds Effective Rate plus 0.50%. The applicable margin for the alternate base rate will vary
from 0.0% to 0.25% depending on the Company’s fixed charge coverage ratio and the margin was 0.0% at November 30, 2007. The eurodollar rate is a periodic fixed rate equal to LIBOR.
The applicable margin for the eurodollar rate will vary from 1.25% to 2.0% depending on the Company’s fixed charge coverage ratio and the margin was 1.5% at November 30, 2007. The
effective interest rate for the Facility was 7.9%, 7.75% and 6.88% during 2007, 2006 and 2005, respectively.
The Facility requires a commitment fee based on the unused portion of the Facility. The commitment fee will vary from 0.125% to 0.25% based on the Company’s fixed charge
coverage ratio and was 0.125% at November 30, 2007.
At November 30, 2007, the Eligible Borrowing Base under the Facility was $77.7 million, outstanding letters of credit were $3.4 million and amounts borrowed were $0.7 million. At
November 30, 2007, the amount available for borrowing under the Facility was $73.6 million.
Cash interest paid was $25.0 million, $20.4 million and $21.2 million for 2007, 2006 and 2005, respectively.
Note M—Employee Benefit Plans
Post-Retirement Benefits
Pension Plans—The Company has a defined benefit pension plan which covers substantially all U.S. based salaried and hourly employees hired prior to December 1, 2004. Normal
retirement age is generally 65, but certain plan provisions allow for earlier retirement. The Company’s funding policy is consistent with the funding requirements of federal law. The pension
plan provides for pension benefits, the amounts of which are calculated under formulas principally based on average earnings and length of service for salaried employees and under
negotiated non-wage based formulas for union hourly employees.
Contributions were neither required nor made in 2007, 2006 and 2005 because the Company’s plan was adequately funded, using assumed returns. The Company anticipates that it
will not make any contributions during 2008. Estimated
51
Table of Contents
Note M—Employee Benefit Plans (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
future benefit payments from the pension trust are as follows: 2008—$12 million, 2009—$13 million, 2010—$13 million, 2011—$14 million, 2012—$14 million, 2013 through 2017—$81
million.
The Company’s non-qualified, unfunded pension plan had an accumulated benefit obligation and projected benefit obligation of $2.0 million and $2.6 million, respectively, as of
November 30, 2007 and $1.8 million and $2.0 million, respectively, as of November 30, 2006.
As discussed in Note B, the Company adopted the recognition provisions of SFAS No. 158 as of November 30, 2006. As of November 30, 2007, the Company recognized a non-
current asset of $9.8 million for the overfunded status of its defined benefit pension plan and a liability of $2.5 million for its unfunded non-qualified pension plan, of which $2.4 million was
non-current. As of November 30, 2006, the Company recognized a liability for the unfunded status of its pension plans of $3.0 million. The Company also recognized in Accumulated other
comprehensive loss the prior service cost and net actuarial loss of these plans. Future changes to the funded status of these plans are recognized in the year in which the change occurs
through other comprehensive income.
The Company anticipates non-cash pension expense to be approximately $5.0 million in 2008.
Health Care Plans—OMNOVA Solutions provides retiree medical plans for certain active and retired employees. The plans generally provide for cost sharing in the form of retiree
contributions, deductibles and coinsurance between the Company and its retirees, and a fixed cost cap on the amount the Company pays annually to provide future retiree medical
coverage. These postretirement benefits are unfunded and are accrued by the date the employee becomes eligible for the benefits. Retirees in certain other countries are provided similar
benefits by plans sponsored by their governments.
Because OMNOVA’s retiree health care benefits are capped, assumed health care cost trend rates have a minimal effect on the amounts reported for the retiree health care plans. A
one-percentage point increase/decrease in assumed health care cost trend rates would not significantly increase or decrease the benefit obligation at November 30, 2007 and would have
no effect on the aggregate of the service and interest components of the net periodic cost.
Estimated future benefit payments for health care plans are as follows: 2008—$1.8 million, 2009—$1.6 million, 2010—$1.5 million, 2011—$1.5 million, 2012—$1.4 million, 2013
through 2017—$6.4 million. Additionally, the Company expects to receive Medicare Part D subsidies to partially offset the estimated future benefit payments of approximately $0.3 million in
each of 2008, 2009 and 2010, $0.2 million in both 2011 and 2012 and a cumulative total of $1.3 million for 2013 through 2017.
In accordance with SFAS No. 158, the Company recognized a liability for the underfunded status of its retiree medical plans of $12.5 million and $19.9 million as of November 30,
2007 and 2006, respectively, of which $11.0 million and $17.1 million, respectively, are reported as non-current. The current portion of the retiree health care plan was $1.5 million and $2.8
million as of November 30, 2007 and 2006, respectively. Additionally, the Company recognized in Accumulated other comprehensive loss the prior service cost and net actuarial gain of
these plans. Future changes to the funded status of these plans are recognized in the year in which the change occurs through other comprehensive income (loss).
During 2005, the Company reached an agreement with GenCorp Inc. concerning a group of certain former GenCorp employees who retired from former GenCorp facilities and were
seeking certain retiree medical benefits from GenCorp and OMNOVA. Under the agreement GenCorp will provide retiree medical benefits to these former employees in exchange for
consideration of $1.0 million payable by the Company to GenCorp over the next eight years. As a result of the agreement with GenCorp, the Company’s health care plans benefit obligation
was reduced and a settlement gain of $1.0 million was recognized.
In April 2007, the Company amended its retiree medical health care plan limiting salaried employee participation to those salaried employees who were eligible to retire as of
March 31, 2007 and who retired by December 31, 2007.
52
Table of Contents
Note M—Employee Benefit Plans (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
The Company expects to record non-cash retiree medical health care income of approximately $1.9 million in 2008.
Change in Benefit Obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial gain
Settlement gain
Benefits paid net of retiree contributions
Benefit Obligation at End of Year
Change in Plan Assets
Fair value of plan assets at beginning of year
Actual return on assets
Employer contributions
Participant contributions
Benefits and expenses paid net of retiree contributions
Fair Value of Plan Assets at End of Year
Funded Status at August 31
Benefits paid September 1 to November 30
Funded Status at November 30
Amounts Recognized in the Consolidated Balance Sheets
Non-current asset
Current liability
Non-current liability
Net Amount Recognized
Pension Plans
Health Care Plans
2007
2006
2007
2006
(Dollars in millions)
$
$
208.0
3.7
12.4
—
(1.5)
—
(11.5)
$
212.7
4.7
11.2
—
(8.5)
(.1)
(12.0)
$
20.7
.2
1.0
(3.0)
(4.6)
—
(1.4)
24.8
.3
1.3
—
(2.9)
(.1)
(2.7)
$
211.1
$
208.0
$
12.9
$
20.7
$
$
$
$
$
$
205.0
24.9
.1
—
(11.6)
$
199.0
18.2
.1
—
(12.3)
218.4
$
205.0
7.3
—
$
(3.0)
—
$
$
$
—
—
1.4
—
(1.4)
—
(12.9)
.4
$
$
$
—
—
2.7
—
(2.7)
—
(20.7)
.8
7.3
$
(3.0)
$
(12.5)
$
(19.9)
$
9.8
(.1)
(2.4)
$
—
—
(3.0)
—
(1.5)
(11.0)
$
—
(2.8)
(17.1)
7.3
$
(3.0)
$
(12.5)
$
(19.9)
As of November 30, 2007 and 2006, the amounts included in Accumulated other comprehensive loss that have not yet been recognized in net periodic benefit cost consist of:
Net actuarial (loss) gain
Prior service costs
53
Pension Plans
Health Care Plans
2007
2006
2007
2006
(Dollars in millions)
$ (36.8)
$ (2.8)
$ (51.5)
(3.6)
$
$
$
27.9
2.1
$ 26.3
(.7)
$
Table of Contents
Note M—Employee Benefit Plans (Continued)
Net Periodic Benefit Cost
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Net Periodic Benefit Cost
Service costs for benefits earned
Interest costs on benefit obligation
Amortization of prior service costs
Assumed return on plan assets
Amortization of net loss (gain)
Settlement gain
Pension Plans
Health Care Plans
2007
2006
2005
2007
2006
2005
(Dollars in millions)
$
3.7 $
4.7 $
3.7 $
.2 $
.3 $
12.4
.8
(15.1)
3.6
—
11.2
.8
(15.2)
4.0
(.1)
11.4
.9
(16.9)
1.2
—
1.0
(.2)
—
(2.5)
—
1.3
(.1)
—
(2.5)
(.1)
.4
2.5
(.2)
—
(1.0)
(1.0)
Total
$
5.4 $
5.4 $
.3 $
(1.5) $
(1.1) $
.7
Other Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income (Loss)
Net gain
Prior service cost (credit)
Total recognized in other comprehensive income (loss)
Amortization of net loss
Amortization prior service cost
$
(11.1)
—
(11.1)
(3.6)
(.8)
$
(4.1)
(2.9)
(7.0)
2.5
.2
Total recognized in net periodic benefit costs and other comprehensive income (loss)
$
(15.5)
$
(4.3)
The estimated net loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated other comprehensive loss during 2008 are $2.6 million and
$0.7 million, respectively. The estimated net gain and prior service cost for retiree medical plans that will be amortized from Accumulated other comprehensive loss during 2008 are $2.5
million and $0.3 million, respectively.
Effective December 1, 2004, the salaried plan provisions of the Company’s defined benefit pension plan were amended to adjust the future benefit calculation, eliminate the early
retirement subsidy, adjust vesting requirements for disability retirement eligibility under the plan and limit salaried employee participation to employees hired on or before November 30,
2004. Salaried employees hired after November 30, 2004 will still be eligible to participate in the Company’s defined contribution plan. At the Company’s Jeannette, Pennsylvania,
Mogadore, Ohio, Calhoun, Georgia and Columbus, Mississippi facilities, union employees hired on or after September 3, 2004, June 1, 2005, March 1, 2007 and May 15, 2007,
respectively, are not eligible to participate in the pension plan.
The accumulated benefit obligation for the Company’s defined benefit pension plan was $202.0 million and $200.5 million at November 30, 2007 and 2006, respectively.
Weighted Average Assumptions
Discount rate used for liability determination
Discount rate used for expense determination
Current trend rate for health care costs
Ultimate trend rate for health care costs
Year reached
Measurement date
Assumed long-term rate of return on plan assets
Annual rates of salary increase
Pension Plans
Health Care Plans
2007
2006
2005
2007
2006
2005
6.55%
6.15%
N/A
N/A
N/A
8/31
8.0%
4.0%
6.15%
5.4%
N/A
N/A
N/A
8/31
8.0%
4.0%
5.4 %
6.3 %
N/A
N/A
N/A
8/31
8.5 %
4.0 %
6.55%
6.15%
10.5%
5.0%
2018
8/31
N/A
N/A
6.15%
5.4%
11.0%
5.0%
2013
8/31
N/A
N/A
5.4%
6.3%
9.4%
5.5%
2013
8/31
N/A
N/A
54
Table of Contents
Note M—Employee Benefit Plans (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. The discount rate used considers rates of return on high-
quality, fixed-income investments that receive one of the two highest ratings given by a recognized investment ratings agency. The increase in the discount rate in 2007 is primarily due to
the higher yield and risk environment for these types of investments.
The assumed long-term rate of return on plan assets assumption is based on the weighted average expected return of the various asset classes in the plans’ portfolio. The asset
class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.
Plan assets consist principally of common stocks and government and corporate debt obligations. Asset allocation at November 30, 2007 and 2006, target allocation for 2007 and
expected long-term rate of return by asset category are as follows:
Asset
Category
Equity securities
Debt securities
Total
Percentage of Plan Assets
At November 30,
2007
2006
Target
Allocation
2007
Weighted-
Average Expected
Long-Term Rate
Of Return
70%
30%
100%
61%
39%
100%
66 %
34 %
100 %
9.0%
5.5%
8.0%
The Company also sponsors a defined contribution 401(k) plan. Participation in this plan is available to substantially all salaried employees and to certain groups of hourly
employees. Contributions to this plan were based on either a percentage of employee contributions or on a specified amount per hour based on the provisions of the applicable collective
bargaining agreement. All Company contributions are made with company stock. The non-cash cost of this plan for the Company was approximately $2.1 million in 2007, $2.1 million in
2006 and $1.5 million in 2005. The defined contribution 401(k) plan contained approximately 1.7 million and 1.8 million shares of the Company’s common stock at November 30, 2007 and
2006, respectively.
The Company also contributes to a defined contribution plan for its U.K. employees. The Company contributes 4% to 8% of the employees’ wages depending upon the age of the
employee. The cost of the plan for the Company was approximately $0.8 million in 2007, $0.3 million in 2006 and $0.6 million in 2005.
Note N—Contingencies and Commitments
From time to time, the Company is subject to various claims, lawsuits and proceedings related to product liability, product warranty, contract, employment, environmental and other
matters arising out of the Company’s business. The ultimate resolution of any litigation is inherently unpredictable. As a result, the Company’s estimates of liability, if any, are subject to
change and actual results may materially differ from the Company’s estimates. In addition, the effect that the ultimate resolution of these matters may have on the financial condition,
results of operations or cash flow of the Company is difficult to predict because any such effect depends on both future results of operations and the amount and timing of the resolution of
these matters. However, based on information currently available to the Company, the Company has not recorded any material accruals for probable loss contingencies and does not
believe it is reasonably possible that the ultimate resolution of these matters will have a material effect on the consolidated financial condition, results of operations or cash flows of the
Company.
The Company leases certain facilities, machinery and equipment and office buildings under long-term, non-cancelable operating leases. The leases generally provide for renewal
options ranging from 5 to 20 years and require the Company to pay for utilities, insurance, taxes and maintenance. Rent expense was $4.5 million in 2007, $4.3 million in 2006 and $4.1
million in 2005. Future minimum commitments at November 30, 2007 for non-cancelable operating leases were $21.8 million with annual amounts declining from $5.0 million in 2008 to
$1.9 million in 2012. The Company’s total obligation for leases after 2012 is $4.4 million.
55
Table of Contents
Note O—Share-Based Compensation Plans
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
The OMNOVA Solutions’ Second Amended and Restated 1999 Equity and Performance Incentive Plan (the “Plan”) permits the Company to grant to officers, key employees and
non-employee directors of the Company, incentives directly linked to the price of OMNOVA Solutions’ common stock. The Plan authorizes up to 6.6 million shares of Company stock for
awards of options to purchase shares of OMNOVA Solutions’ common stock, performance stock and performance units, restricted stock, deferred stock or appreciation rights. Shares used
may be either newly issued shares or treasury shares or both. All options granted under the Plan have been granted at exercise prices equal to the market value of the Company’s common
stock on the date of grant. Additionally, the Plan provides that the term of any stock option granted under the Plan may not exceed 10 years. The second amendment to the Plan, which
was approved by shareholders on March 22, 2007, also added a fungible share design, changed share counting provisions and dividend rights, added additional metrics to management
objectives and other administrative changes. As of November 30, 2007, approximately 2.3 million shares of Company common stock remained available for grants under the Plan.
Stock options granted under the GenCorp 1993 and 1997 Stock Option Plans (“GenCorp Options”) to OMNOVA Solutions employees and GenCorp employees prior to the spin-off
were partially converted into OMNOVA Solutions options and partially into GenCorp options with adjustments to preserve their value. The OMNOVA Solutions options, which were issued
pursuant to the conversion process, were granted under the OMNOVA Solutions Inc. Option Adjustment Plan (the Adjustment Plan). The Adjustment Plan authorized up to 4.0 million
shares of Company common stock solely for the purpose of accomplishing the conversion described above. Shares used may be either newly issued shares or treasury shares or both. No
further options may be granted under the Adjustment Plan.
Prior to December 1, 2005, the Company accounted for its share-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion
(“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” in accounting for its employee stock options.
Under APB 25, because the exercise price of the stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.
Effective December 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123 (Revised) using the modified prospective method. Under this method,
compensation cost for stock options in 2006 and future periods includes the portion of awards vested in the period for (1) all share-based payments granted prior to, but not vested as of
December 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to
December 1, 2005, based on the grant date fair value estimated using a Black-Scholes based option valuation model, consistent with the provisions of SFAS No. 123 (Revised) and
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, “Share-Based Payment,” using the weighted average assumptions in the table below.
Risk-free interest rate
Dividend yield
Volatility of expected market price of Company stock
Weighted average life of options in years
Years Ended November 30,
2007
2006
2005
4.4%
—%
45%
5.8
4.6%
—%
46%
5.8
4.4%
—%
44%
7.0
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option. The expected volatility is based on a blend
of the Company’s peer group in the industry in which it does business and the Company’s historical volatility. The expected term of options granted is estimated considering the vesting
periods and historical trends within the Company’s equity plans and represents the period of time that options granted are
56
Table of Contents
Note O—Share-Based Compensation Plans (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
expected to be outstanding. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and
subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under SFAS No. 123 (Revised).
A summary of the Company’s stock option activity and related information for the years ended 2007, 2006 and 2005 is as follows:
2007
2006
2005
Outstanding at beginning of year
Granted
Forfeited or expired
Exercised
Outstanding at end of year
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
4,510,111
1,000
(672,592)
(13,187)
$
$
$
$
7.82
6.23
9.31
4.19
5,193,635
6,000
(513,649)
(175,875)
$
$
$
$
7.70
5.51
7.76
4.55
5,972,849
20,500
(712,314)
(87,400)
$
$
$
$
7.56
4.91
6.92
4.53
3,825,332
$
7.57
4,510,111
$
7.82
5,193,635
$
7.70
The weighted average grant date fair value of options granted was $3.05, $2.76 and $2.58 during 2007, 2006 and 2005, respectively.
The following table summarizes the range of exercise prices and weighted average exercise prices for options outstanding and exercisable at November 30, 2007 under the
Company’s stock option plans:
$3.09 — $4.99
$5.00 — $5.99
$6.00 — $6.99
$7.00 — $7.99
$8.00 — $8.99
$9.00 — $14.37
Total
Outstanding Options
Exercisable Options
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
4.14
5.25
6.50
7.50
8.30
14.11
7.57
Number
698,000
485,675
349,650
566,360
1,266,324
459,323
3,825,332
Weighted
Average
Remaining
Contractual
Life (yrs)
5.1
3.5
3.3
2.2
2.9
.4
Number
693,625
482,925
347,900
566,360
1,266,324
459,323
3,816,457
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
4.14
5.25
6.50
7.50
8.30
14.11
7.57
There were 4,476,361 and 4,920,600 stock options exercisable with weighted average prices of $7.84 and $7.89 at November 30, 2006 and 2005, respectively.
Restricted stock grants consist of the Company’s common stock. The Board set a two or three year vesting period for most of the issued restricted shares. The fair value of each
restricted share grant is equal to the market price of the Company’s common stock at the date of grant. Expense relating to restricted shares is amortized ratably over the vesting period.
57
Table of Contents
Note O—Share-Based Compensation Plans (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
A summary of the Company’s restricted stock activity and related information for the years ended November 30, 2007, 2006 and 2005 is as follows:
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
2007
2006
2005
Weighted
Average
Grant
Date Fair
Value
Shares
Weighted
Average
Grant
Date Fair
Value
Shares
Shares
Weighted
Average
Grant
Date Fair
Value
376,576 $
291,320 $
(87,872) $
(4,000) $
5.50
6.12
5.36
5.62
260,975 $
305,399 $
(162,858) $
(26,940) $
5.42
5.55
5.46
5.51
173,967
199,503
(86,670)
(25,825)
$
$
$
$
5.59
5.32
5.59
5.21
576,024 $
5.84
376,576 $
5.50
260,975
$
5.42
No tax benefits are recognized currently for the granting of share-based compensation arrangements because it is more likely than not that such benefit cannot be realized.
Compensation expense for all share-based payments, included in general and administrative expense, was $0.9 million, $0.8 million and $1.0 million during 2007, 2006 and 2005,
respectively.
As of November 30, 2007, there was $2.3 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements to be amortized over
the next 2.7 years.
The intrinsic value of stock options exercised during 2007, 2006 and 2005 was less than $0.1 million, $0.3 million and $0.1 million, respectively.
During 2007, 2006 and 2005, cash received from options exercised was $0.1 million, $0.8 million and $0.4 million, respectively.
Note P—Business Segment Information
Segment information has been prepared in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” The Company’s two operating
segments were determined based on products and services provided. Accounting policies of the segments are the same as those described in the significant accounting policies.
The Company’s two operating segments are: Performance Chemicals and Decorative Products. The Company’s operating segments are strategic business units that offer different
products and services. They are managed separately based on fundamental differences in their operations.
The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene, styrene butadiene acrylonitrile,
styrene butadiene vinyl pyridine, polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal and fluorochemical chemistries. Performance Chemicals’ custom-formulated products are
tailored for coatings, binders and adhesives, which are used in paper, carpet, nonwovens, construction, adhesives, paper tape, tire cord, floor polish, textiles, graphic arts, plastic parts and
various other applications. Its products provide a variety of functional properties to enhance the Company’s customers’ products, including greater strength, adhesion, dimensional stability,
water resistance, flow and leveling, improved processibility and enhanced appearance. The Performance Chemicals
58
Table of Contents
Note P—Business Segment Information (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
segment consists of two product lines. The Paper and Carpet Chemicals product line encompasses products that have applications in the paper and carpet industries. Paper coatings are
used in magazines, catalogs, direct mail advertising, brochures, printed reports, food cartons, household and other consumer and industrial packaging. Carpet binders are used to secure
carpet fibers to carpet backing and meet the stringent manufacturing, environmental, odor, flammability and flexible installation requirements. The Specialty Chemicals product line
encompasses products that have applications for nonwovens (such as diaper and hygiene components, engine filters, resilient flooring underlay, roofing mat, shoe components and
household scrub pads), floor polish, paper tape, adhesives, tire cord, textiles, construction and plastic part coatings.
The Decorative Products segment develops, designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated
fabrics, vinyl, paper and specialty laminates and industrial films. These products are used in numerous applications, including commercial building refurbishment, remodeling and new
construction, residential cabinets, flooring and furnishings, transportation markets including school busses, marine and automotive, manufactured housing and a variety of industrial films
applications.
The Decorative Products segment consists of three product lines. The Contract Interiors (formerly Commercial Wallcoverings) product line includes wallcovering and upholstery used
in refurbishment and new construction applications for the commercial office, hospitality, health care, retail, education and restaurant markets. The Coated Fabrics product line applications
include marine and transportation seating, commercial and residential furniture, automotive soft top covers and a variety of industrial film applications. The Laminates product line
applications include kitchen and bath cabinets, manufactured housing and recreational vehicle interiors, flooring, commercial and residential furniture, retail display, home furnishings and
consumer electronics.
Effective December 1, 2006, the Company renamed its Commercial Wallcoverings product line Contract Interiors and realigned certain products from the Coated Fabrics product line
to Contract Interiors in order to better reflect common sales and marketing resources used to serve customers. All prior period amounts have been reclassified to conform to current year
presentation.
The Company’s operations are located primarily in the United States and Europe. Additionally, the Company has joint venture manufacturing facilities in China and Thailand. Inter-
area sales are not significant to the total sales of any geographic area. No one customer accounted for 10% or more of consolidated net sales.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance costs, asset write-offs and work stoppage costs relating
to operations. However, management excludes restructuring and severance costs, asset write-offs and work stoppage costs when evaluating the results and allocating resources to the
segments.
Segment operating profit excludes unallocated corporate headquarters expenses, provisions for corporate headquarters restructuring and severance, interest expense and income
taxes. Corporate headquarters expense includes the cost of providing and maintaining the corporate headquarters functions, including salaries, rent, travel and entertainment expenses,
depreciation, utility costs, outside services and amortization of deferred financing costs.
Segment operating profit for 2007, 2006 and 2005 was impacted by a number of items which were discussed earlier in this Annual Report. Management excludes certain of these
items when evaluating the results of the Company’s segments. These items for 2007 included restructuring and severance charges of $0.8 million and a gain on a building sale of $0.7
million; for 2006 restructuring and severance charges of $1.1 million, trademark impairment charges of $1.0 million, and fixed asset write-offs of $0.1 million; and for 2005 restructuring and
severance charges of $5.8 million, asset impairment charges of $2.5 million, gain on a legal settlement of $0.9 million, gain on the sale of a wallcovering brand of $0.8 million and work
stoppage charges of $1.7 million.
59
Table of Contents
Note P—Business Segment Information (Continued)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
The following table sets forth a summary of operations by segment and a reconciliation of segment sales to consolidated sales and segment operating profit (loss) to consolidated
income (loss) from continuing operations before income taxes.
Net Sales
Performance Chemicals
Paper and Carpet Chemicals
Specialty Chemicals
Total Performance Chemicals
Decorative Products
Contract Interiors
Coated Fabrics
Laminates
Total Decorative Products
Total Net Sales
Segment Operating Profit
Performance Chemicals
Decorative Products
Total segment operating profit
Interest expense
Corporate expenses
Debt redemption expense
Income (Loss) From Continuing Operations Before Income Taxes
Total Assets
Performance Chemicals
Decorative Products
Corporate
Equity Investments
Decorative Products
Capital Expenditures
Performance Chemicals
Decorative Products
Corporate
Depreciation and Amortization
Performance Chemicals
Decorative Products
Corporate
60
2007
2006
2005
(Dollars in millions)
$ 308.9 $
166.4
290.7 $
150.9
297.9
154.9
$ 475.3 $
441.6 $
452.8
$ 122.3 $
77.8
70.1
113.7 $
72.8
71.0
93.7
89.3
59.2
$ 270.2 $
257.5 $
242.2
$ 745.5 $
699.1 $
695.0
$ 23.8 $
29.7 $
8.6
9.0
$ 32.4 $
(16.5)
(10.4)
(12.4)
38.7 $
(21.3)
(14.1)
—
33.8
(2.8)
31.0
(22.6)
(11.4)
—
$
(6.9) $
3.3 $
(3.0)
$ 144.1 $
159.1
23.2
145.0 $
152.5
41.4
152.1
145.5
20.3
$ 326.4 $
338.9 $
317.9
$ 22.2 $
19.1 $
16.2
$
7.9 $
5.2
3.1
5.8 $
6.7
.5
5.0
4.9
2.5
$ 16.2 $
13.0 $
12.4
$ 11.1 $
11.4 $
8.7
.3
8.5
.3
12.2
8.8
.1
$ 20.1 $
20.2 $
21.1
Table of Contents
Note P—Business Segment Information (Continued)
GEOGRAPHIC INFORMATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Net Sales
United States
United States export sales
Europe
Asia
Segment Operating Profit
United States
Europe
Asia
Total Assets
United States
Europe
Asia
Long-Lived Assets
United States
Europe
Asia
Unconsolidated Asian Joint Ventures
CPPC—Decorative Products Co., Ltd.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net sales
Gross profit
Operating income (loss)
Net income (loss)
CG—OMNOVA Decorative Products (Shanghai) Co., Ltd.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net sales
Gross profit
Operating income
Net income
2007
2006
2005
(Dollars in millions)
$
632.4 $
33.2
77.1
2.8
596.4 $
36.9
64.5
1.3
598.3
30.3
65.9
.5
$
745.5 $
699.1 $
695.0
$
29.3 $
2.6
.5
36.2 $
.9
1.6
29.7
.7
.6
$
32.4 $
38.7 $
31.0
$
245.7 $
55.6
25.1
266.3 $
52.0
20.6
252.6
47.9
17.4
$
326.4 $
338.9 $
317.9
$
122.5 $
17.4
.1
126.7 $
17.4
.1
137.5
17.1
.1
$
140.0 $
144.2 $
154.7
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
25.4 $
9.0 $
13.1 $
— $
47.1 $
2.2 $
.5 $
.5 $
20.0 $
10.1 $
10.7 $
.1 $
56.3 $
6.0 $
1.9 $
1.9 $
22.8 $
7.4 $
12.4 $
— $
45.1 $
3.5 $
1.1 $
1.1 $
16.0 $
9.9 $
5.5 $
— $
47.4 $
7.2 $
3.7 $
3.7 $
18.7
7.3
11.0
—
42.5
1.0
(.9)
(.9)
13.8
10.5
6.6
—
38.1
5.7
2.8
2.8
The Company’s other joint venture, Beston OMNOVA Plastics (Taicang) Company, Ltd., is not presented as their results of operations were not material in 2007.
61
Table of Contents
Note Q—Subsequent Events
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
On December 28, 2007, the Company amended its Senior Secured Revolving Credit Facility (“Facility”) to increase the availability from $80 million to $90 million and allow the
Company to utilize borrowings under the Facility to purchase the minority interests of its Asian joint ventures. All terms, including applicable spreads on interest rates, remained the same.
Total availability will vary throughout the year with fluctuations in the borrowing base.
On January 7, 2008, the Company announced that it had completed the acquisition of the minority interests in its joint venture businesses, Decorative Products (Singapore) Pte., Ltd.
(“DPS”), a Singapore limited company, and CPPC—Decorative Products Co., Ltd. (“CPD”), a Thailand limited company. DPS is a holding company which owns 100% of both CG-
OMNOVA Decorative Products (Shanghai) Co., Ltd. (“CGO”) and Beston OMNOVA Plastics (Taicang) Co., Ltd. (“Taicang”). Both CGO and Taicang are registered and incorporated in the
Peoples Republic of China. The minority interests of both DPS and CPD, representing approximately 49.9% of their respective registered equity, was acquired from CPPC Public Company
Limited for $28.0 million in cash and a contingent payment of $2.0 million based on the achievement of certain 2008 financial results. The acquisition was effective as of December 31,
2007. As a result, these entities will be reflected as wholly-owned subsidiaries in 2008.
62
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
OMNOVA SOLUTIONS INC.
Quarterly Financial Data (Unaudited)
Three Months Ended
February 28,
May 31,
August 31,
November 30,
2007
Net sales
Gross profit (1) (3)
Restructuring and severance
Debt redemption expense (2)
(Loss) income from continuing operations (4)
Net (Loss) Income(4)
(Loss) income per share from continuing operations
Basic and diluted (5)
Net (loss) income per share (5)
Basic and diluted
Common stock price range per share—high
—low
2006
Net sales
Gross profit (1) (3)
Restructuring and severance
Idled fixed asset write-down (7)
Intangible asset write-down (6)
(Loss) income from continuing operations (7)
Net (Loss) Income(8)
(Loss) income per share from continuing operations
Basic and diluted (5)
Net (loss) income per share (5)
Basic and diluted
Common stock price range per share—high
—low
$
$
$
$
$
$
$
$
$
$
(Dollars in millions, except per share amounts)
$
$
$
$
$
$
188.0
37.2
.1
(12.4)
(9.8)
(9.8)
196.8
36.9
.1
—
4.5
4.5
$
$
$
$
$
$
$
$
$
$
$
$
164.8
30.1
.3
—
(5.1)
(5.1)
(.12)
(.12)
6.74
4.50
$
$
$
$
(.23)
(.23)
6.45
5.00
$
$
$
$
.11
.11
6.50
4.74
$
$
$
$
Three Months Ended
195.9
36.1
.5
—
3.4
3.7
.08
.09
6.00
4.48
February 28,
May 31,
August 31,
November 30,
$
$
$
$
$
$
$
$
$
$
$
(Dollars in millions, except per share amounts)
$
$
$
$
$
$
$
177.8
40.9
—
—
—
5.2
5.3
175.1
37.9
—
—
—
2.3
3.3
$
$
$
$
$
$
$
$
$
$
$
$
$
$
169.8
34.1
—
—
—
(3.6)
(4.3)
(.08)
(.10)
7.25
4.59
$
$
$
$
.13
.13
6.47
5.35
$
$
$
$
.06
.08
6.58
5.30
$
$
$
$
176.4
37.0
(1.3)
(.1)
(1.0)
(.7)
17.0
(.02)
.41
5.72
4.00
(1) Gross profit excludes depreciation expense. Depreciation expense related to manufacturing facilities and equipment was $3.7 million for each of the three months ended
February 28, May 31, August 31 and November 30, 2007, respectively, and $3.8 million, $3.7 million, $3.9 million and $3.3 million for the three months ended
February 28, May 31, August 31 and November 30, 2006, respectively.
(2) For the three months ended May 31, 2007, the Company recorded debt redemption expense in connection with the redemption of its $165 Million 11 1/4% Senior Secured Notes.
(3) For the three months ended November 30, 2007 and 2006, the Company recorded inventory adjustment gains of $1.5 million and $2.0 million, respectively.
(4) For the three months ended November 30, 2007, the Company recorded a gain on the sale of a building of $0.7 million.
(5) The sum of the quarterly EPS amounts may not equal the annual amount due to changes in the number of shares outstanding during the year.
(6) For the three months ended November 30, 2006, the Company recorded a trademark impairment charge of $1.0 million.
(7) For the three months ended November 30, 2006, the Company recorded asset impairment charges of $0.1 million for idled fixed assets.
(8) For the three months ended November 30, 2006, the Company recorded a gain on the sale of its Building Products segment of $18.2 million.
63
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no change in accountants or disagreements with the Company’s independent registered public accounting firm regarding accounting and financial disclosure
matters during the two most recent years of the Company or during any period subsequent to the date of the Company’s most recent consolidated financial statements.
Item 9A.
Controls and Procedures
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and
procedures as of November 30, 2007, and, based on this evaluation, has determined that the Company’s disclosure controls and procedures are effective. Further, during the quarter
ended November 30, 2007, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. Management’s annual report on the Company’s internal control over financial reporting and the attestation report of the Company’s
independent registered public accounting firm are set forth on pages 30 and 31 of this report and are incorporated herein by reference.
Item 9B.
Other Information
Not applicable.
Item 10.
Directors and Executive Officers of the Registrant
PART III
Information with respect to nominees who will stand for election as directors of the Company at the 2008 Annual Meeting of Shareholders is set forth on pages 9 and 10 of the
Company’s 2008 Proxy Statement and is incorporated herein by reference. Information with respect to directors of the Company whose terms extend beyond the 2008 Annual Meeting of
Shareholders is set forth on pages 10 through 12 of the Company’s 2008 Proxy Statement and is incorporated herein by reference. Information regarding the Company’s Audit Committee
and its Audit Committee Financial Expert is set forth on page 3 of the Company’s 2008 Proxy Statement and is incorporated herein by reference.
Information with respect to procedures by which shareholders may recommend nominees for election to the Company’s Board of Directors is set forth on pages 4 and 5 of the
Company’s 2008 Proxy Statement and is incorporated herein by reference. Also see Executive Officers of the Registrant on page 14 of this Report.
Information with respect to compliance with Section 16(a) of the Exchange Act of 1934, as amended, is set forth on page 49 of the Company’s 2008 Proxy Statement and is
incorporated herein by reference.
The Company has adopted a code of ethics that applies to all of its employees, including its principal executive officer, principal financial officer and principal accounting officer, as
well as its directors. The Company’s code of ethics, the OMNOVA Solutions Business Conduct Policies, is available on its website at www.omnova.com.
Item 11.
Executive Compensation
Information regarding executive compensation is set forth on pages 15 through 49 of the Company’s 2008 Proxy Statement and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding the security ownership of certain beneficial owners and management is set forth on pages 13 and 14 of the Company’s 2008 Proxy Statement and is
incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth certain information as of November 30, 2007, regarding the Company’s two existing compensation plans, the Second Amended and Restated 1999
Equity and Performance Incentive Plan and the Option Adjustment Plan. Both of these plans have been approved by the Company’s shareholders. See Note O to the Consolidated
Financial Statements for further information regarding the Company’s share-based compensation plans.
64
Table of Contents
Equity Compensation Plan Information
As of November 30, 2007
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding
options,
warrants and rights
Number of securities
remaining available
for future
issuance under equity
compensation plans
3,825,322
N/A
3,825,322
$
$
7.82
N/A
7.82
2,309,204
N/A
2,309,204
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions and director independence is set forth on pages 6 and 7 of the Company’s 2008 Proxy Statement and is
incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
Information regarding fees paid to and services provided by the Company’s independent registered public accounting firm during the years ended November 30, 2007 and 2006, the
pre-approval policies and procedures of the Audit Committee of the Company’s Board of Directors and related information is set forth on page 52 of the Company’s 2008 Proxy Statement
and is incorporated herein by reference.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements of OMNOVA Solutions Inc. are included in Item 8:
Consolidated Statements of Operations for the years ended November 30, 2007, 2006 and 2005
Consolidated Balance Sheets at November 30, 2007 and 2006
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended November 30, 2007, 2006 and 2005
Notes to the Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules:
The financial statements for the Company’s unconsolidated joint ventures, CPPC—Decorative Products Co., Ltd. and CG – OMNOVA Decorative Products (Shanghai) Co., Ltd., will
be filed as schedules to this Annual Report on Form 10-K by an amendment hereto. All other consolidated financial statement schedules are omitted because they are inapplicable, not
required by the instructions or the information is included in the consolidated financial statements or notes thereto.
65
Table of Contents
(a)(3) Exhibits
Exhibit
Description
EXHIBIT INDEX
2.1*
3.2**
3.4**
10.3†
10.5†
10.6**†
10.7†
10.8**†
10.9**†
10.11**†
10.14†
10.15*
10.16*
10.17*
10.18*
10.19**
10.20**
10.21**
10.22†
10.23†
10.24†
10.25†
10.26†
10.29
ACQUISITION AGREEMENTS
Distribution Agreement between OMNOVA Solutions Inc. (OMNOVA Solutions) and GenCorp Inc. (GenCorp).
CHARTER DOCUMENTS
Form of Amended and Restated Articles of Incorporation of OMNOVA Solutions.
Amended and Restated Code of Regulations of OMNOVA Solutions.
MATERIAL CONTRACTS
Employment Agreement dated December 1, 2000 between OMNOVA Solutions and Kevin M. McMullen (incorporated by reference to the same numbered exhibit
to the Company’s Annual Report on Form 10-K for the year ended November 30, 2000 (File No. 1-15147)).
Severance Agreement dated December 1, 2000 between OMNOVA Solutions and Kevin M. McMullen (incorporated by reference to the same numbered exhibit
to the Company’s Annual Report on Form 10-K for the year ended November 30, 2000 (File No. 1-15147)).
Form of Severance Agreement granted to certain executive officers of OMNOVA Solutions (other than the officer identified above).
OMNOVA Solutions Second Amended and Restated 1999 Equity and Performance Incentive Plan (incorporated by reference to Annex A to the Company’s Proxy
Statement dated February 9, 2007, as filed with the Commission on February 9, 2007 (File No. 1-15147)).
OMNOVA Solutions Deferred Compensation Plan for Nonemployee Directors.
Retirement Plan for Nonemployee Directors of OMNOVA Solutions.
Benefits Restoration Plan for Salaried Employees of OMNOVA Solutions.
OMNOVA Solutions Long-Term Incentive Program, as amended and restated effective January 19, 2007 (incorporated by reference to the same numbered
exhibit to the Company’s Current Report on Form 8-K filed with the Commission on January 24, 2007 (File No. 1-15147)).
Tax Matters Agreement between OMNOVA Solutions and GenCorp.
Alternative Dispute Resolution Agreement between OMNOVA Solutions and GenCorp.
Agreement on Employee Matters between OMNOVA Solutions and GenCorp.
Services and Support Agreement between OMNOVA Solutions and GenCorp.
Form of Director and Officer Indemnification Agreement.
Form of Director Indemnification Agreement.
Form of Officer Indemnification Agreement.
Form of Deferred Share Agreement.
Form of Performance Share Agreement (incorporated by reference to the same numbered exhibit to the Company’s Annual Report on Form 10-K for the year
ended November 30, 2006 (File No. 1-15147)).
Form of Restricted Stock Agreement (incorporated by reference to the same numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended
November 30, 2006 (File No. 1-15147)).
Summary of Compensation and Benefit Arrangements for Non-Employee Directors of OMNOVA Solutions Inc. (incorporated by reference to the same numbered
exhibit to the Company’s Annual Report on Form 10-K for the year ended November 30, 2005 (File No. 1-15147)).
OMNOVA Solutions Executive Incentive Compensation Program (incorporated by reference to the same numbered exhibit to the Company’s Current Report on
Form 8-K filed with the Commission on January 26, 2006 (File No. 1-15147)).
Amended and Restated Credit Agreement dated as of May 22, 2007 by and among OMNOVA Solutions Inc., as borrower, the financial institutions party thereto,
as Lenders, and JPMorgan Chase Bank N.A., as agent for the Lenders (incorporated by reference to the same numbered exhibit to the Company’s Quarterly
Report on Form 10-Q for the quarter ended May 31, 2007 (File No. 1-15147)).
66
Table of Contents
Exhibit
Description
10.30
10.31
12.1
21.1
23.1
24.1
31.1
31.2
32.1
Term Loan Credit Agreement dated as of May 22, 2007 by and among OMNOVA Solutions Inc., as Borrower, the financial institutions party thereto as Lenders, and
Deutsche Bank Trust Company Americas, as agent for the Lenders (incorporated by reference to the same numbered exhibit to the Company’s Quarterly Report on
Form 10-Q for the quarter ended May 31, 2007 (File No. 1-15147)).
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of December 28, 2007, by and among OMNOVA Solutions Inc., as Borrower, the financial
institutions party thereto, as Lenders, and J.P. Morgan Chase Bank, N.A., as Agent for the Lenders.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Computation of Ratio of Earnings to Fixed Charges.
SUBSIDIARIES OF THE REGISTRANT
Listing of Subsidiaries.
CONSENTS OF EXPERTS
Consent of Independent Registered Public Accounting Firm.
POWER OF ATTORNEY
Powers of Attorney executed by E. P. Campbell, D. A. Daberko, D. J. D’Antoni, S. W. Percy, R. B. Pipes, W. R. Seelbach and R. A. Stefanko, Directors of the
Company.
CERTIFICATIONS
Principal Executive Officer’s Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Executive Officer’s Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The Company will supply copies of any of the foregoing exhibits to any shareholder upon receipt of a written request addressed to OMNOVA Solutions Inc., 175 Ghent Road, Fairlawn,
Ohio 44333-3300, Attention: Secretary, and payment of $1 per page to help defray the costs of handling, copying and return postage.
* Incorporated by reference to the same-numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended November 30, 1999 (File No. 1-15147).
** Incorporated by reference to the same-numbered exhibit to the Company’s Registration Statement on Form 10 (File No. 1-15147).
†
Management contract or compensatory arrangement.
67
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: January 25, 2008
OMNOVA SOLUTIONS INC.
By
/s/ J. C. LEMAY
J. C. LeMay
Senior Vice President,
Business Development;
General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature
Title
Date
/s/ K. M. MCMULLEN
Chairman, Chief Executive Officer and President
January 25, 2008
K. M. McMullen
/s/ M. E. HICKS
M. E. Hicks
*
E. P. Campbell
*
D. A. Daberko
*
D. J. D’Antoni
*
S. W. Percy
*
R. B. Pipes
*
W. R. Seelbach
*
R. A. Stefanko
*Signed by the undersigned as attorney-in-fact
and agent for the Directors indicated.
/s/ K.C. SYRVALIN
K. C. Syrvalin
Senior Vice President and Chief Financial Officer
January 25, 2008
Director
Director
Director
Director
Director
Director
Director
68
January 25, 2008
January 25, 2008
January 25, 2008
January 25, 2008
January 25, 2008
January 25, 2008
January 25, 2008
January 25, 2008
Exhibit 31.1
I, Kevin M. McMullen, certify that:
1. I have reviewed this Annual Report on Form 10-K of OMNOVA Solutions Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 25, 2008
/s/ Kevin M. McMullen
Name: Kevin M. McMullen
Title:
Chairman, Chief Executive Officer and
President
Exhibit 31.2
I, Michael E. Hicks, certify that:
1. I have reviewed this Annual Report on Form 10-K of OMNOVA Solutions Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Michael E. Hicks
Name: Michael E. Hicks
Title:
Senior Vice President and Chief Financial Officer
Date: January 25, 2008
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of OMNOVA Solutions Inc. (the “Company”) on Form 10-K for the year ended November 30, 2007 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the
periods expressed in the Report.
/s/ Kevin M. McMullen
Name: Kevin M. McMullen
Title:
/s/ Michael E. Hicks
Name: Michael E. Hicks
Title:
Chairman, Chief Executive Officer and President
Senior Vice President and Chief Financial Officer
Date: January 25, 2008
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
_______________________________________________
Created by 10KWizard www.10KWizard.comSource: OMNOVA SOLUTIONS INC, 10-K, January 25, 2008
D I R E C T O R S & O F F I C E R S
Board of Directors
Edward P. Campbell 2
Kevin M. McMullen 3
William R. Seelbach 2
COMMITTEES
Chairman and
Chief Executive Officer,
Nordson Corporation
David A. Daberko 2,3
Retired Chairman and
Chief Executive Officer,
National City Corporation
Chairman, Chief Executive Officer
Operating Executive,
and President,
OMNOVA Solutions Inc.
Steven W. Percy 1
Former Chairman and
Chief Executive Officer,
BP America Inc.
The Riverside Company
Robert A. Stefanko 1
Retired Chairman and
Executive Vice President –
Finance and Administration,
A. Schulman, Inc.
David J. D’Antoni 1
Dr. R. Byron Pipes 2,3
Retired Senior Vice President
John L. Bray Distinguished
and Group Operating Officer,
Professor of Engineering,
Ashland Inc.
Purdue University
Officers
1 Audit Committee
Chairman:
Steven W. Percy
2 Compensation and Corporate
Governance Committee
Chairman:
David A. Daberko
3 Executive Committee
Chairman:
Kevin M. McMullen
Kevin M. McMullen
James C. LeMay
James J. Hohman
Sandra L. Klaasse
Chairman, Chief Executive Officer
Senior Vice President, Business
Vice President; President,
Vice President, LEAN SixSigma
and President
Development; General Counsel
Performance Chemicals
Kristine C. Syrvalin
Michael E. Hicks
Douglas E. Wenger
Robert H. Coleman
Vice President, Human Resources
Senior Vice President and
Senior Vice President and
President, Decorative Products
Administration;
Chief Financial Officer
Chief Information Officer
Chester W. Fox
Vice President, Treasurer
C O R P O R A T E I N F O R M A T I O N
Shareholder Information
Assistant General Counsel
and Secretary
NYSE Annual CEO Certification
BuyDIRECT
Annual Meeting of Shareholders
OMNOVA Solutions Foundation
The annual CEO certification required by
BuyDIRECT is a direct purchase,
March 19, 2008 at 9:00 a.m.
175 Ghent Road
Section 303A.12(a) of the New York Stock
sale and dividend reinvestment
Hilton Akron – Fairlawn
Fairlawn, OH 44333-3300
Exchange Listed Company Manual was
plan available to shareholders and
3180 West Market Street
330-869-4289
submitted by Kevin M. McMullen without
interested first-time investors.
Fairlawn, OH 44333
qualification on April 12, 2007.
It offers a convenient method of
Transfer Agent and Registrar
The Bank of New York
1-866-220-6360
1-201-680-6685 (outside U.S. and Canada)
1-800-231-5469 (hearing impaired – TTY phone)
shareowners@bankofny.com (email)
http://www.bnymellon.com/shareowner/isd
(website)
Address shareholder inquiries to:
OMNOVA Solutions
c/o BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310-1900
Send certificates for transfer and
address changes to:
OMNOVA Solutions
c/o BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
increasing investment in the Company.
Subject to terms and conditions of
the plan, dividends (if any), together
with optional cash investments of up
to $120,000 per year, are used to
buy more shares of the Company’s
Common Stock.
Send dividend reinvestment
transactions to:
OMNOVA Solutions
c/o BNY Mellon Shareowner Services
P.O. Box 358035
Pittsburgh, PA 15252-8035
1-866-220-6360
Common Stock Listing
New York Stock Exchange
Ticker Symbol: OMN
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Independent Registered
Public Accounting Firm
Ernst & Young LLP
Akron, OH
Form 10-K
Communications
General inquiries, contact:
Corporate Communications,
330-869-4266.
Financial literature requests,
contact: PrecisionIR Group,
1-888-400-7789.
Additional copies available after
March 1, 2008 on the internet at
Internet Website
www.omnova.com or by writing to:
www.omnova.com
OMNOVA Solutions is an equal
opportunity employer.
OMNOVA Solutions Inc.
175 Ghent Road
Fairlawn, OH 44333-3300
Attention: Secretary
Shareholder Services
1-800-735-5160
Investor Relations Contact
Michael E. Hicks
Senior Vice President and
Chief Financial Officer
330-869-4411
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PAPER STOCK: The cover and inside glossy pages of this report are printed on paper produced at an FSC-certified mill and contain post-consumer recycled content.
The paper is coated with OMNOVA’s GenCryl Pt® latex and was printed using vegetable-based inks.
PHOTOS: Boat upholstery photo courtesy of Regal Marine Industries, Inc.
O M N O VA S O L U T I O N S I N C . w w w. o m n o v a . c o m
F a i r l a w n , O H 4 4 3 3 3
3 3 0 - 8 6 9 - 4 2 0 0
1 7 5 G h e n t R o a d
GENCRYL PT and VIEWNIQUE are registered trademarks of OMNOVA Solutions Inc.
DESIGN4 COLLECTION, OMNAGLO and ECORE are trademarks of OMNOVA Solutions Inc.
© 2008 OMNOVA Solutions Inc.