2010 annual report and 10-K performanceopportunity Financial HighlightsYears Ended November 30,(Dollars in millions, except per share data)201020092008Net SaleSPerformance Chemicals $ 527.9 $ 396.8 $ 521.6Decorative Products 318.3 299.6 347.8 $ 846.2 $ 696.4 $ 869.4SegmeNt OperatiNg prOfit (lOSS)Performance Chemicals $ 73.3 $ 48.0 $ 25.2Decorative Products (18.0) 1.6 (6.5)Interest expense (8.7) (8.1) (13.0)Corporate expenses (28.1) (13.6) (7.7)Income tax benefit (expense) 89.4 (1.7) (0.2)Net iNcOme (lOSS) $ 107.9 $ 26.2 $ (2.2)Net income (loss) per share – diluted $ 2.40 $ .59 $ (.05)Other DataCapital expenditures $ 14.8 $ 10.4 $ 14.8Depreciation and amortization $ 20.6 $ 22.9 $ 23.9Number of employees at year-end 2,430 2,320 2,630reported earnings (loss) per Diluted ShareDollarsNet SalesDollars in millionsadjusted earnings (loss) per Diluted Share*DollarsNet DebtDollars in millions0809102.40080910869.4696.4846.2080910179.0111.271.40809100.59(0.05)0.880.65(0.03)0809102.40080910869.4696.4846.2080910179.0111.271.40809100.59(0.05)0.880.65(0.03)0809102.40080910869.4696.4846.2080910179.0111.271.40809100.59(0.05)0.880.65(0.03)0809102.40080910869.4696.4846.2080910179.0111.271.40809100.59(0.05)0.880.65(0.03)resultsexecution OMNOVA SOLUTIONS 1 I am pleased to report that in 2010 OMNOVA Solutions had its best year ever. Our focused growth strategies, productivity actions and key business improvement initiatives yielded meaningful progress on many fronts, even in the face of a sluggish economy and rapid inflation in our raw materials. As a result of continued performance improvements and growing recognition of future opportunities, our shareholders saw a 33% increase in the value of their shares during the fiscal year.We achieved strong financial performance in a number of areas in 2010*:■ Sales of $846 million, up 22% from 2009■ Adjusted Net Income of $39.5 million, an increase of 36% from 2009; Reported Net Income of $107.9 million, up $82 million from 2009 ■ Adjusted Diluted Earnings Per Share of $0.88 versus $0.65 last year, and Reported Diluted Earnings Per Share of $2.40, also up significantly from the previous year■ Free cash flow generation, which reduced net debt by $40 million■ Improved balance sheet, reducing net leverage (prior to ELIOKEM acquisition) to 1.0 times from 2.0 times in 2009 ■ Performance Chemicals segment operating profit, as adjusted, of $64 million, up 31% from last year*Includes non-GAAP financial measures. See the “Non-GAAP and Other Financial Measures” reconciliation tables on pages 9 and 10.To Our Shareholders,The acquisition of ELIOKEM in early fiscal 2011 adds powder polymer capability such as the Pliolite® polymers manufactured at this facility in Akron, Ohio. Kevin McMullen Chairman and CEO As part of the ELIOKEM acquisition, the Company completed a successful refinancing in the fourth quarter. The refinancing was used to acquire ELIOKEM in our 2011 first quarter and pay off existing debt that was due to mature in the next few years. It will also provide resources to operate the business. This was no easy feat in the current economic climate, but the strong performance of most of our core businesses and the strategic fit of the acquisition provided a clear and compelling story to our investors. Our position was enhanced by OMNOVA’s strong record of debt reduction made possible by productivity gains and the lowest cost structure in our history. The Company reduced net debt by approximately $40 million in 2010 and $108 million over the past two years.With increasing sales and a focused diligence on controlling costs, we were able to reduce year-over-year selling, general and administrative costs to 11.8% of revenues. This was not only well below 2009 SG&A levels, but also under the 12.1% posted in 2008, our highest sales year ever.Sales were our second highest since OMNOVA Solutions was formed 11 years ago, thanks to share gains from innovative new products, further growth in adjacent markets and global expansion, as well as structural pricing changes. As a result of strong organic growth and continued productivity initiatives, OMNOVA was able to turn in another year of significantly improved profits as reflected in the $0.88 adjusted earnings per share, which was our highest ever, up 35% from 2009. The ongoing fundamental improvements in our Performance Chemicals business segment highlighted 2010 and paved the way for OMNOVA’s acquisition of specialty chemicals producer ELIOKEM early in our 2011 fiscal year. This acquisition transforms our Performance Chemicals business by expanding our participation in new, adjacent, higher-growth applications and accelerating our capability to serve a worldwide marketplace with manufacturing plants in Europe, Asia and North America that complement our existing North American facilities.Expansion into higher-growth markets and geographies is a key component of OMNOVA’s strategy. The acquisition of ELIOKEM at the beginning of the 2011 fiscal year presents exciting opportunities to continue to accelerate OMNOVA’s global growth.USA78%Europe 8%Asia14%USA60%Europe & Africa 17% Asia & Middle East 23%OMNOVA 2010 Pro Forma Sales, Including ELIOKEMOMNOVA 2010 Sales2 OMNOVA SOLUTIONS our SAP business platform. Material shortages were also an industry-wide issue during the year, but excellent work by our global sourcing and logistics team allowed us to work through this challenge without impacting service to our customers.It was encouraging to see our chemical volumes increase 11% overall for the year. Paper and specialty chemicals were both up, while the market for carpet chemicals was down for the fifth consecutive year. In May, OMNOVA terminated its RohmNova paper coating sales and service joint venture, an action neces-sitated by Dow Chemical’s acquisition of our former JV partner, Rohm and Haas. Each company had maintained separate technical organizations and manufacturing capabilities, so product development, production and customer support did not miss a beat. In late 2010, the Company determined that it would be able to realize the future benefits of its prior net operating loss carryforwards due to OMNOVA’s improved profitability in the last three years and its improved outlook. This allowed the Company to reverse $98.2 million of its U.S. deferred income tax valuation allowance (partially offset by additional tax expense of $7.7 million) and recognize non-cash income of $90.5 million. For the next several years, cash taxes will continue to be largely offset by prior net operating losses, but the Company will be recording a significantly higher book tax expense.Performance Chemicals: Solutions for SuccessPerformance Chemicals achieved strong operating profit improvement in 2010, notwithstanding the return of record raw material cost increases. Raw material costs rose $83.5 million for the year, but were countered by structural pricing strategies first implemented in 2008 and ongoing productivity initiatives enabled by LEAN SixSigma and globalizationgrowthOMNOVA SOLUTIONS 3World HeadquartersFairlawn, OHPerformance cHemicalsGreen Bay, WIMogadore, OHFitchburg, MACalhoun, GAChester, SCLondon, U.K.Shanghai, ChinaeliokemAkron, OHLe Havre, FranceVillejust, FranceMumbai, India Valia, India Caojing, China Ningbo, ChinaSingaporedecorative ProductsAuburn, PAJeannette, PAMonroe, NCColumbus, MSHertfordshire, U.K.Kent, U.K.Asnières, FranceParis, FranceWarsaw, PolandDubai, UAE Rayong, Thailand Shanghai, ChinaTaicang, China In conjunction with the dissolution of RohmNova, OMNOVA acquired Dow Chemical’s hollow plastic pigment (HPP) product line, which expands our offering of paper coating chemicals. We also see uses for HPP in other specialty markets. Business wins and solid trialing activity in paper position us well moving into 2011. New account wins in our specialty product lines – where volumes were up a record 16% – were the result of differentiated solutions that included bio-based and other environmentally preferred polymers and high performance emulsions. Applications include nonwoven personal hygiene products, tapes and adhesives, floor polishes, construction materials, textile finishes and printing inks, as well as oil and gas drilling. Sales of our oil field chemicals were especially strong in 2010 with the addition of two prominent global customers. OMNOVA’s products used in water-based applications for oil and gas drilling provide an excellent complement to those acquired through our purchase of ELIOKEM, which are formulated into oil- and synthetic-based drilling products. Much of the success in specialties stems from the solid work of our teams in Europe and Asia to deliver Major Product categories Functions diFFerentiatorsPaper and Paperboard Gloss; Strength; Opacity; Reputation for innovation; Dimensional stability; GenCryl Pt® high performance Resistance to moisture; latex platform; Pilot paper coater Enhanced printability. for mill-condition trials; Bio-based polymers.carpet Adhere fibers to backing. Low odor and water resistant offerings; High solids for reduced energy usage in manufacturing.nonwovens Fluid transfer; Wet and Patented technology; Global dry strength; Thermal capability; Low/no formaldehyde. and dimensional stability; Resiliency; Fluid repellency.Floor care High gloss and wear Environmentally preferred solutions; properties; Lower Lower maintenance costs with long- maintenance requirements; term, safe, clean and attractive wear Flow, leveling and wetting. properties. Performance Chemicals4 OMNOVA SOLUTIONSinnovationsolutions growth despite the absence of Company-owned manufacturing assets in these regions. With the addition of the ELIOKEM chemical plants in France, China, India and the United States, OMNOVA is in an even better position to accelerate global growth going forward. The plant in India and two plants in China are poised to serve the rapidly developing markets in Asia, and include a new facility just outside Shanghai. Operationally, Performance Chemicals continued to raise the bar in 2010, delivering its best year ever in safety, productivity and inventory turns. ELIOKEM: Accelerating Our Growth StrategyAs we have said often, globalization is a key part of our growth strategy. The ELIOKEM transaction delivers not only on that score, but also supports the other two major components of our strategy – penetration of new, adjacent markets and above-market growth in existing markets. In both cases, we will leverage the power of new products and technologies. About 75% of the markets served by ELIOKEM are new to OMNOVA, yet its products are based on emulsion polymer chemistry and use many of the same raw materials and processes. Additionally, the ELIOKEM plants can produce finished OMNOVA Solutions is a leader in the design, development and manufacture of emulsion polymers, specialty chemicals, and decorative and functional surfaces that add value in a global marketplace. The Performance Chemicals segment works closely with customers to create customized solutions for targeted applications based on styrene butadiene latex, acrylics and a wide range of other chemistries. The Decorative Products segment leverages breadth of scale in materials and manufacturing, superior design and coatings expertise in the production of a variety of high performance surfaces. Both segments hold number-one or -two positions in key applications.Major Product categories functions differentiatorstapes, Labels Strength; Mechanical Full tape system capability;and adhesives stability; Fast curing; Tailored rate of release; Temperature and water Environmentally preferred resistance; Release solutions. coatings.construction Adhesion; Moisture Global availability; barrier; Strength; Proprietary technology; Dimensional stability. Environmentally preferred formulations.oil field High temperature and Proprietary technology for pressure stability; Fluid water-based drilling fluids; loss control; Sealing Bio-based polymers. properties.textiles Softness; Lubrication; Global capability; Pioneer Soil release; Fluid repellency; in durable press; Targeted Wrinkle resistance; technologies. Performance coating.specialty Latices for fiber-to-rubber Global availability; adhesion, including tire cord; Proprietary technologies. Opacifiers; Ink vehicles; In-mold primers; Appearance coatings. polymers in dry powder form. We believe this could open new applications and market opportunities for OMNOVA, as it complements our water-based finishing capability. During the fourth quarter, cross-functional teams from both OMNOVA and ELIOKEM were focused on preparing for the successful 2011 combination of our companies and realization of the synergies inherent in this union. While all of this activity could have been a distraction for some organizations, to their credit, our associates remained steadfastly focused on what got us here: strong customer relationships, profitable growth and execution in our core businesses. Both OMNOVA Performance Chemicals and ELIOKEM continued to grow throughout 2010, which will position us well for the future. Decorative Products: A Challenging YearAfter solid improvement in profitability in 2009, we were disappointed by the performance of our Decorative Products segment in 2010. Several end markets remained slow, raw material inflation accelerated significantly late in the year and operational challenges hindered our progress. As a consequence, top-line growth of more than 6% did not result in a profitable year. The one exception was our laminates product line, which delivered double-digit operating profit growth through business wins, new product introductions and laminate manufacturing productivity improvements. Even in difficult markets, this business has been successful at providing customers with value-added solutions across OMNOVA’s acquisition of global specialty chemicals producer ELIOKEM in early fiscal 2011 adds these new, adjacent product categories and applications.Major Product categories functions differentiatorscoatings Protection and decoration; Specialty high performance Stain blocking; Water-proofing resin; Global availability; of concrete and masonry Brand recognition; Reputation architectural structures; for service. Fire protection.antioxidants Protection of natural Global availability; Leading brand rubber and synthetic latex; recognized as reference for Stabilization of ABS the industry. plastics and PVC.oil field High/ultra high temperature Unique technology for and pressure stability; Fluid oil/synthetic drilling fluids. loss control; Very low formation damage.elastomeric Modifiers Soft touch; Flexibility; Modulus; Reference elastomers for modification Elasticity; UV/oil of flexible PVC; Broadest range; chemical resistance. Unique acrylate chemistry; Worldwide presence. specialty rubber/ Oil, chemical and ozone Only nitrile rubber producer in India;rubber reinforcing resistance; Weatherability; New vinyl pyridine latex plant in Hardness; Modulus; Flex Caojing, China. properties; Latices for fiber-to- rubber adhesion, including tire cord. its end-use categories, including furniture, store fixtures, kitchen and bath cabinets, flooring, recreational vehicles, and health care applications.The situation was much different in our coated fabrics and commercial wallcovering product lines, which were negatively affected by sluggish demand, rapid raw material cost escalation – particularly in the second half of the year – as well as operational issues in both the United States and Asia. North American commercial wallcovering industry demand was down double digits for 2010 and, while showing some signs of improvement late in the year, is off nearly 50% from its peak a few years ago.Raw material costs were up a record $13.3 million for the year, with $7 million of that in the fourth quarter alone. Our Asian plants were hit particularly hard as growth in the region and government policy decisions in China further impacted short-term raw material shortages that, in turn, led to rapid inflation. In May, amidst the highly challenging and competi-tive market conditions in the commercial wallcovering industry, employees represented by the United Steelworkers of America commenced a strike at our commercial wallcovering plant in Columbus, Mississippi. The Company has bargained in good faith, seeking to make the changes it believes are critical to improving the plant’s competitiveness and future viability while at the same time continuing to provide market-competitive wages and benefits to our Union-represented employees. Major Product categories functions differentiatorscoated fabrics Design; Performance High performance coatings (durability, cleanability). (durability, stain and abrasion resistance, easy cleaning); Global manufacturing; Array of constructions (urethane, vinyl); Broad design range.Laminates Decorative surfaces for Color/pattern matching cabinetry, furniture, fixtures across substrates; Design and walls; 3D surfaces; flexibility; Global capability; Design; Performance. High performance coatings.Performance films Custom unsupported films Broad specification capability; designed to specific customer Printing; Global manufacturing. requirements.commercial Wallcovering Design; Durable and Strong environmental profile; cleanable wall protection Durability; Wide range of design, and decoration; Digitally printed color and textures; Global manufacturing large-format murals. and distribution; Custom capabilities.DecorativeProductsinnovationsolutions 8 OMNOVA SOLUTIONSWhile we were disappointed that our Union-represented employees chose this course of action, OMNOVA has continued to serve customers with quality products without disruption. This is due to the outstanding efforts of our dedicated salaried employees as well as replacement employees who have quickly come up to speed on our production processes. During the year, the Company incurred $5.5 million in strike-related costs. These costs peaked in July and declined significantly as the year progressed, and are expected to be negligible in 2011. Without question, improving the profitability of our Decorative Products business is a major priority for 2011. Driving operational effectiveness will be crucial, as will overcoming raw material inflation. Pricing actions taken during the fourth quarter and continuing during 2011 will begin to recover margins.Despite the disappointing year, Decorative Products continues to offer an exciting and diverse portfolio of differentiated products to its customers. These include products with strong environmental profiles, excellent design and color-matching across a variety of sub- strates, and coatings that provide superior durability and soil and scratch resistance. We also are finding increased opportunities to serve higher-growth appli- cations and regions such as health care and the Asian automotive market. Going Forward: Enhanced Opportunities and CapabilitiesEven with challenges in some of our businesses, 2010 was a year of clear and continued progress overall for OMNOVA Solutions, thanks to the outstanding teamwork and accomplishments of our 2,430 associates. They come to work each day committed to making a difference, and for their efforts and dedication I am deeply grateful.And for our investors, I am pleased to present a record year for your Company. We significantly enhanced shareholder value by refusing to give in to economic pressures and, instead, proving that OMNOVA Solutions is truly focused on taking the actions that will deliver profitable growth in both good and challenging times. We remain committed to increasing long-term share-holder value.Entering 2011, OMNOVA Solutions is a much larger, more diverse specialty chemical and functional surfaces company. On a pro forma basis, we are now a business with $1.1 billion in sales with significantly enhanced global opportunities and capabilities. We are participating in exciting, higher-growth adjacent markets and leveraging a broader range of solutions to serve both existing and new customers and applications. Challenges remain, but clear progress in 2010 and over the last several years has created an improved platform on which to build an even brighter future.Thanks for your support, Kevin M. McMullenChairman and CEOshareholder valueprofitable growth Non-GAAP and Other Financial Measures
Reconciliation Tables for: (A) Adjusted Segment Operating Profit (Loss), (B) Adjusted Net Income (Loss),
(C) Adjusted Diluted Earnings (Loss) Per Share and (D) Net Debt
This Annual Report includes adjusted segment operating profit (loss), adjusted net income (loss), adjusted diluted earnings (loss) per share and net debt which are
non-GAAP financial measures as defined by the Securities and Exchange Commission. Management reviews these adjusted financial measures in assessing the
performance of the business segments and in making decisions regarding the allocation of resources to the business segments. Management also believes that this
information is useful for providing investors with an understanding of the Company’s business and operating performance. Management excludes the items shown
in the reconciliation tables because management does not consider them to be reflective of normal operations. These adjusted financial measurements are not
measurements of financial performance under GAAP and such financial measures should not be considered as an alternative to segment operating profit (loss), net
income (loss), diluted earnings (loss) per share or other measures of financial performance determined in accordance with GAAP. Management also believes that
Net Debt is an important measure of its financial condition. Net Debt does not take into account the need to maintain certain cash reserves to meet short-term
liquidity demands, restrictions on the availability of cash to repay debt, including restrictions on cash repatriation, or possible currency gains or losses in connection
with currency conversions. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. The tables below
provide the reconciliations of these financial measures to the comparable GAAP financial measures.
(A) Adjusted Segment Operating Profit (Loss) Reconciliation
(Dollars in millions)
Performance chemicals segment operating Profit
Restructuring and severance
Asset impairment
Net retirement benefit plan curtailments
RohmNova JV dissolution gain
Total adjustments to Performance Chemicals’ segment operating profit
Performance chemicals’ adjusted segment operating Profit
decorative Products segment operating (loss) Profit
Restructuring and severance
Flood damage
Asset impairment
Strike-related costs
Net retirement benefit plan curtailments
Other
Total adjustments to Decorative Products’ segment operating (loss) profit
decorative Products’ adjusted segment operating (loss) Profit
(B) Adjusted Net Income (Loss) Reconciliation
net income
Restructuring and severance(1)
Flood damage(1)
Asset impairment(1)
Strike-related costs(1)
Net retirement benefit plan curtailments(1)
RohmNova JV dissolution gain(1)
Other(1)
Acquisition interest related to Senior Notes(2)
Acquisition and integration expenses(2)
Acquisition related foreign currency hedge fair value adjustment(2)
Additional income tax expense(3)*
Tax valuation allowance reversal(3)
adjusted net income (loss)
Years Ended November 30,
2010
2009
2008
$ 73.3
.4
—
.1
(9.7)
(9.2)
$ 64.1
$ (18.0)
.2
—
6.2
5.5
3.2
.9
16.0
$ 48.0
.2
.6
.2
—
1.0
$ 49.0
$ 1.6
1.8
.6
.5
—
(.7)
.3
2.5
$ 25.2
.1
—
—
—
.1
$ 25.3
$ (6.5)
.5
—
—
—
—
—
.5
$ (2.0)
$ 4.1
$ (6.0)
$ 107.9
.6
—
6.2
5.5
3.3
(9.7)
(.1)
1.6
5.5
9.2
7.7
(98.2)
$ 39.5
$ 26.2
2.1
.6
1.1
—
(.9)
—
(.1)
—
—
—
—
—
$ (2.2)
.6
—
—
—
—
—
—
—
.1
—
—
—
$ 29.0
$ (1.5)
* The additional income tax expense is the amount of the additional taxes that the Company recorded in the fourth quarter and for the full year which was
primarily the result of recording a tax provision without an offsetting valuation allowance causing the effective tax rate to change from 6% to a standard
rate of 40%.
summary of excluded items:
(1)Total of other adjustments
(2)Total of acquisition related items
(3)Total of tax related items
total of excluded items
$ 5.8
16.3
(90.5)
$ (68.4)
$ 2.8
—
—
$ 2.8
$ .7
—
—
$ .7
OMNOVA SOLUTIONS
9
(C) Adjusted Diluted Earnings (Loss) Per Share Reconciliation
(Dollars)
diluted earnings (loss) Per share
Restructuring and severance(1)
Flood damage(1)
Asset impairment(1)
Strike-related costs(1)
Net retirement benefit plan curtailments(1)
RohmNova JV dissolution gain (1)
Other(1)
Acquisition interest related to Senior Notes(2)
Acquisition and integration expenses(2)
Acquisition related foreign currency hedge fair value adjustment(2)
Additional income tax expense(3)
Tax valuation allowance reversal(3)
total earnings Per share impact of excluded items
adjusted diluted earnings (loss) Per share
summary of earnings Per share impact of excluded items:
(1)Total of earnings per share impact of other adjustments
(2)Total of earnings per share impact of acquisition related items
(3)Total of earnings per share impact of tax related items
total of earnings Per share impact of excluded items
(D) Reconciliation of Total Debt to Net Debt*
(Dollars in millions)
Total debt
Outstanding letters of credit and interest rate swaps
Cash and cash equivalents
Net Debt
Years Ended November 30,
2010
2009
2008
$ 2.40
$ .59
$ (.05)
.01
.05
.02
—
.01
—
.14
.02
—
.12
—
—
.07
(.02)
—
(.21)
—
—
—
—
—
.04
—
—
.12
—
—
.20
—
—
.17
—
—
(2.18)
—
—
(1.52)
.06
.02
$ .88
$ .65
$ (.03)
$ .13
$ .06
$ .02
.36
—
—
(2.01)
—
—
$ (1.52)
$ .06
$ .02
Years Ended November 30,
2010
2009
2008
$ 144.2
2.8
$ 144.1
8.6
$ 188.3
8.1
(75.6)
(41.5)
(17.4)
$ 71.4
$ 111.2
$ 179.0
*The calculation of Net Debt excludes the $250 million of new Senior Notes and the related $253.1 million of restricted cash held in escrow at fiscal year-
end pending the ELIOKEM acquisition.
This Annual Report includes “forward-looking statements,” as defined by federal securities laws. These statements, as well as any verbal statements by
the Company related to this Annual Report, are intended to qualify for the protections afforded forward-looking statements under the Private Securities
Litigation Reform Act of 1995. Forward-looking statements reflect management’s current expectation, judgment, belief, assumption, estimate or forecast
about future events, circumstances or results and may address business conditions and prospects, strategy, capital structure, sales, profits, earnings,
markets, products, technology, operations, customers, raw materials, financial condition, and accounting policies among other matters. Words such
as, but not limited to, “will,” “may,” “should,” “projects,” “forecasts,” “seeks,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,”
“targets,” “optimistic,” “likely,” “would,” “could” and similar expressions or phrases identify forward-looking statements. All forward-looking statements
involve risks and uncertainties. For further information on risks and uncertainties, see Item 1A Risk Factors in the Business Section of the 10-K.
10
OMNOVA SOLUTIONS
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, 2010
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ‘ No Í
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ‘ No Í
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 Í No ‘
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 Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any,
interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes ‘ No ‘
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ‘ Accelerated filer Í
Non-accelerated filer ‘
(do not check if a smaller
reporting company)
Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act)
Yes ‘ No Í
The aggregate market value of the voting stock held by nonaffiliates of the registrant was $348,991,721 based on the
closing price per share of $8.03 on May 28, 2010, the last business day of the registrant’s most recently completed second
quarter.
As of January 18, 2011, there were 45,001,085 outstanding shares of the Company’s Common Stock, 10¢ par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2011 Proxy Statement of OMNOVA Solutions Inc. are incorporated into Part III of this Report.
OMNOVA Solutions Inc.
Annual Report on Form 10-K
For the Year Ended November 30, 2010
Table of Contents
Item
Number
PART I
1
1A
1B
2
3
4
4A
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
5
6
7
7A
8
9
9A
9B
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
10
11
12
13
14
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, Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
1
8
15
16
16
17
17
19
20
21
37
40
85
85
85
85
85
85
86
86
15
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
89
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 it was spun-off by GenCorp Inc., the former parent
company. 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, which
have been built through innovative products, customized product solutions, strong technical expertise, well-established
distribution channels, recognized brands and long-standing customer relationships. We utilize 16 strategically located
manufacturing, technical and other facilities in North America, Europe and Asia to service our broad customer base.
OMNOVA operates two business segments: Performance Chemicals and Decorative Products. Of our 2010 net sales,
62% were derived from the Performance Chemicals segment and 38% were derived from the Decorative Products segment.
Financial information relating to the Company’s business segments is set forth in Note O to the Consolidated Financial
Statements of this report.
Performance Chemicals
Background
Our Performance Chemicals segment began in 1952 as part of GenCorp (then known as The General Tire & Rubber
Company). Initially, the business focused on the manufacture of styrene butadiene latex for the paper industry and styrene
butadiene vinyl pyridine latex for tire cord adhesives in a single facility in Mogadore, Ohio. Since that time, the business has
grown through internal development and acquisitions to include global manufacturing capabilities and numerous
chemistries and product applications.
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, fluorochemical and hollow plastic pigment chemistries. We are
North America’s second largest producer of SB latex and a leading supplier of SB latex to the paper and specialty markets.
We 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, oil/gas drilling
services, adhesives, tape, tire cord, floor polish, textiles, graphic arts, plastic parts, bio-based polymers 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 value-added solutions to customers.
1
The following table shows major Performance Chemicals products, end-use applications and brand names:
Product Category
Paper and Carpet
Chemicals
% of Performance
Chemicals Fiscal
2010 Net Sales
62.5%
Specialty
Chemicals
37.5%
Primary Products
End-use Applications
Brand Names
SB and SBA latex
coating binders,
carpet backing
binders and paper
chemicals including
crosslinkers,
lubricants, other
coating additives and
hollow plastic
pigments
Magazines, catalogs,
direct mail
advertising,
brochures and
printed reports,
specialty papers, food
cartons, household
and other consumer
and industrial
packaging, and
residential and
commercial carpet
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
hygiene products,
engine filters, roofing
mat and scrub pads),
construction,
adhesives, masking
tapes, tire cord, floor
polish, textiles,
graphic arts, oil/gas
drilling services and
plastic part coatings
GENCAL, GENFLO,
GENCRYL, GENCRYL
PT, NOVAGREEN,
REACTOPAQUE,
SUNKOTE,
SUNBOND,
SUNKEM,
UNIQ-PRINT,
SEQUABOND,
SUNREZ, SEQUAREZ,
OMNABLOC,
OMNAGLIDE,
OMNATUF
GENFLO, GENCRYL,
GENTAC,
OMNAGLO,
OMNAPEL,
SEQUABOND,
SUNCRYL, SECOAT,
SECRYL, MOR-GLO,
MOR-SHINE,
MOR-FLO,
NOVACRYL,
ACRYGEN, MYKON,
PERMAFRESH,
SEQUAPEL,
POLYFOX, X-CAPE,
GENGLAZE,
MYKOSOFT,
MYKOSIL, NOVANE,
GENCEAL
Paper and Carpet Chemicals. OMNOVA is a leading North American supplier of custom-formulated SB and SBA latex
and hollow plastic pigments 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 printability, strength, gloss, opacity, and
moisture resistance 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, specialty papers, food cartons
and 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 39.0% of our
consolidated net sales for 2010, 35.8% of our consolidated net sales for 2009 and 38.8% of our consolidated net sales for 2008.
Specialty Chemicals. OMNOVA is a leading North American supplier of specialty polymers and chemicals for a variety
of product categories. Applications for our specialty polymers and chemicals include nonwovens (such as hygiene products,
2
engine filters, roofing mat, scrub pads), floor polish, tape, adhesives, tire cord, textiles, construction, oil/gas drilling services,
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. Sales of our Specialty Chemicals
products represented 23.4% of our consolidated net sales for 2010, and 21.2% for 2009 and 2008.
Markets and Customers
The paper coating and carpet backing product lines are highly competitive based on quality, customer service, product
performance, price, field technical support and product innovations. Major paper and carpet customers include NewPage,
Verso, Shaw Industries, Sappi and Beaulieu. The specialties product line includes many product categories such as tire cord
adhesives, components for 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
Sherwin Williams, PGI, Freudenburg, Hyosung, Shurtape, Xerox and Fiberweb.
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 Styron and BASF. Performance
Chemicals also competes with a variety of other suppliers of specialty chemicals including Lubrizol, Wacker, Celanese, Dow,
and Arkema. Depending on the products involved and markets served, the basis of competition varies 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, SB vinyl pyridine, tire cord adhesives, floor care polymers and polymers used in the manufacturing of
masking and other tapes.
Decorative Products
Background
Our Decorative Products segment began in 1945 when GenCorp (then known as The General Tire & Rubber Company)
purchased a coated fabrics manufacturing facility located in Jeannette, Pennsylvania from the Pennsylvania Rubber
Company. Since that time, the business has grown through internal development and acquisitions to include four domestic
and five international manufacturing sites and a wide range of decorative and functional surfacing products.
In 1999 and 2000, the business established manufacturing joint ventures in Thailand and China with an affiliate of
Thailand-based Charoen Pokphand Group to expand its coated fabrics and performance film capabilities into the Asia
Pacific region and provide expanded product lines to North America and Europe. The Company held a 50.1% interest in
each joint venture. During the first quarter of 2008, OMNOVA acquired the remaining equity interests in these joint ventures,
which are now wholly-owned subsidiaries of the Company.
Products
Our Decorative Products segment develops, designs, produces and markets a broad line of functional and decorative
including coated fabrics, commercial wallcoverings, vinyl, paper and specialty laminates and
surfacing products,
including commercial building refurbishment,
performance films. These products are used in numerous applications,
remodeling and new construction; residential cabinets, flooring and furnishings; retail display; transportation markets
3
including busses and mass transit, marine, motorcycle and automotive; recreational vehicles; manufactured housing; medical
devices and products; and a variety of industrial film applications. Our core competencies in design, coating, compounding,
calendering, casting, printing and embossing enable us to develop unique, aesthetically pleasing decorative surfaces that
have functional properties, such as cleanability, durability and scratch and stain resistance, that address specific customer
needs. We have strong color and design capabilities, an extensive design library covering a broad range of patterns,
textures and colors, and strong product formulation and coating and processing capabilities. Together these capabilities
provide our products with the functionality and aesthetics that add value for our customers. In addition, our broad range of
products, global presence and end-use applications gives us economies of scale in sourcing, manufacturing, design, sales
and marketing, product and process development.
The following table shows the products that our Decorative Products segment develops, designs, produces and
Primary Products
End-use Applications
Brand Names
markets.
Product Category
Commercial
Wallcovering, Coated
Fabrics
% of Decorative
Products Fiscal
2010 Net Sales
69.1%
Vinyl and non-vinyl
nanofiber based
wallcoverings,
recyclable and 30%
recycled content
wallcovering,
customized wall
murals; vinyl and
urethane coated
fabrics
BOLTA, ESSEX,
GENON, TOWER,
MURASPEC, MUREK,
VIEWNIQUE,
DIVERSIWALL, ECORE,
RECORE, BOLTAFLEX,
BOLTASOFT,
NAUTOLEX, PREFIXX,
PREVAILL
PREEMPT, RADIANCE,
SURF(X) 3D, DESIGN4,
EFX, DURAMAX
Decorative and
protective wall and
seating surfacing for
offices, hotels, hospital
and health care
facilities, stores,
schools, restaurants
and public buildings;
decorative and
protective surfacing for
transportation and
marine seating,
automotive soft top
covers, commercial
and residential
furniture, performance
fabrics for numerous
applications including
medical products
Decorative and
protective surfacing for
kitchen and bath
cabinets, manufactured
housing recreational
vehicle interiors,
flooring, commercial
and residential
furniture, retail display
fixtures, home
furnishings and
consumer electronics,
performance films for
pool liners, banners,
tents, ceiling tiles and
medical products
Laminates and
Performance Films
30.9%
Vinyl, paper and
specialty laminates;
performance films
4
Commercial Wallcovering, Coated Fabrics. OMNOVA Solutions is a leading North American, European and Asian
supplier of wallcoverings and coated fabrics used in commercial applications. Our commercial wallcoverings are recognized
for their leading color and designs as well as their strength, durability and cleanability. Our wallcoverings, in addition to their
aesthetic appeal, reduce repair and maintenance costs for building owners by protecting wall surfaces and having longer
lives as compared to paint and paper wallcoverings. Applications for our commercial wallcoverings include
useful
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 extensive 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.
OMNOVA Solutions is a leading North American and Asian supplier of vinyl and urethane coated fabrics and
performance fabrics for commercial, residential, transportation and medical applications. Our durable coated fabrics are
well-suited for demanding, high-use environments and offer a cost effective alternative to other surfacing materials, such as
leather and textile fabrics. Applications for our coated fabrics include transportation seating (automotive OEM, bus and
other mass transit, marine and motorcycle), automotive soft tops, automotive aftermarket applications, contract and medical
furniture and product fabric applications. Sales of our commercial wallcovering and coated fabrics products represented
26.0% of our consolidated net sales for 2010, 31.3% for 2009 and 29.0% for 2008.
In late 2008, OMNOVA Solutions introduced RECORE® Recycled Wall Technology—the “best in class” recycled
commercial wallcovering platform for wallcoverings that look, perform and hang like traditional vinyl wallcoverings and
feature a guaranteed minimum 30% recycled content. All new designs introduced in the leading OMNOVA brands—Bolta®,
Essex™, Genon® and Tower®—feature RECORE® Recycled Wall Technology. OMNOVA also offers wallcoverings featuring
ECORE® Advanced Wall Technology, a non-PVC construction for architects and designers seeking alternatives to vinyl. In
addition, both RECORE® and ECORE® qualify for critical points in building projects seeking LEED (Leadership in Energy and
Environmental Design) certification as a part of the U.S. Green Building Council’s sustainable building initiative. These
innovations further enhance OMNOVA’s leadership position for both branded and private label offerings while meeting the
growing demand for sustainable products.
Laminates and Performance Films. OMNOVA Solutions is a leading North American supplier of vinyl and paper
laminates and performance films. Our laminates are used as alternatives to wood, paint, stone, stainless steel 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 fixtures, home furnishings, and
consumer electronics. Performance film applications include banners, tents, medical products, pool liners, movie screens
and shower pan liners.
A key strength of our laminates business is our coating technology, including ultraviolet, melamine, urethane, thermal
In addition, our laminates business has
cured and others, which provides durable finishes for high-wear applications.
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 a variety 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 and health care 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 and providing enhanced cleanability/disinfection. Sales of
our Laminates and Performance Films products represented 11.6% of our consolidated net sales for 2010, 11.7% for 2009
and 11.0% for 2008.
5
Markets and Customers
We believe that our Decorative Products segment is a leader in its targeted product categories. The coated fabrics,
commercial wallcovering, laminates and performance films businesses are highly competitive based on decorative content,
functional performance, price, quality, customer service, global capability, 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 in this segment include Steelcase, Armstrong, CGT, BYD, Ashley Furniture, Patrick Industries,
Herculite and Masco.
Marketing and Distribution
Our Decorative Products segment distributes its products through a variety of channels. Commercial 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 customers. Coated fabrics, laminates and performance
films are sold directly and through agents to manufacturers of cabinets, furniture, seating, health care and medical
components, 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, our website (www.omnova.com) and other media.
Competition
OMNOVA’s Decorative Products segment competes with numerous companies, many of which focus on only one
product line and/or market and are smaller and privately-owned. Competitors include:
(cid:129) Commercial Wallcovering and Coated Fabrics—RJF International, US Vinyl, J. Josephson, Vescom, Laminating
Surfaces, Morbern, China General, Uniroyal and Spradling International
(cid:129) Laminates and Performance Films—Chiyoda Gravure, Dai Nippon Printing, Toppan Printing, Renolit Corporation, LG
ChemAmerica, Riken USA Corporation and Spartech Industries
International Operations
Net sales from our foreign operations were $180.5 million in 2010, $166.5 million in 2009 and $170.4 million in 2008.
These net sales represented 21.3% of our total net sales in 2010, 23.9% of our total net sales in 2009 and 19.6% of our total
net sales in 2008. Long-lived assets primarily consist of net property, plant and equipment and net intangibles. Long-lived
assets of our foreign operations totaled $39.3 million at November 30, 2010 and $41.4 million at November 30, 2009. Our
consolidated long-lived assets totaled $137.3 million at November 30, 2010 and $146.3 million at November 30, 2009.
In a subsequent event which will be reflected in fiscal 2011 results, on December 9, 2010, the Company completed the
acquisition of all the outstanding shares of Eliokem International SAS (“Eliokem”) from AXA Investment Managers Private
Equity Europe and the other holders of equity securities of Eliokem. Eliokem is a worldwide manufacturer of specialty
chemicals used in a diverse range of niche applications including coating resins, elastomeric modifiers, antioxidants, oilfield
chemicals and latices for specialty applications. Eliokem is headquartered in Villejust, France and has manufacturing facilities
located in France, China, India and the United States. Eliokem’s 2010 sales were $288.0 million.
In January 2008, the Company 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 OMNOVA Decorative Products (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.
The acquisition was effective December 31, 2007.
6
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. Our patents 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 for environmental compliance, please
refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters”
on page 36 of this report, which is incorporated herein by reference.
Employees
At November 30, 2010, the Company employed approximately 2,430 employees at offices, plants and other facilities
located principally throughout the United States, United Kingdom, China and Thailand. Approximately 14% or 350 of the
Company’s employees are covered by collective bargaining agreements in the United States. In March 2010, the Company
and its Calhoun, Georgia employees represented by Local 1876, Southern Region of Workers United, SEIU, agreed to a new
three year contract. On May 20, 2010, the approximately 180 Columbus, Mississippi employees represented by United
Steelworkers Local #748-L voted against ratification of a new contract proposal and subsequently went on strike on
May 21, 2010.
Initially, the Company’s salaried workforce and contract labor operated the plant, meeting customers’
requirements. During the fourth quarter of 2010, the Company began transitioning from contract labor to locally hired
replacement employees. The Company incurred strike-related costs of $5.5 million in 2010, of which $3.3 million was
included in cost of goods sold and $2.2 million included in other expense (income). Strike-related costs peaked in July 2010
and have declined significantly since then. In the fourth quarter of 2010, strike-related costs were $1.2 million, compared to
$3.9 million in the third quarter of 2010. The Company generally would describe its relationship with employees as good
even though its union-represented Columbus, Mississippi employees chose to go on strike.
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
emulsion polymers produced by this segment. Key monomers include styrene, butadiene, acrylates, acrylonitrile, vinyl
acetate and vinyl pyridine. These monomers represented approximately 76% of Performance Chemicals’ total raw materials
purchased on a dollar basis in 2010 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,
plasticizers and textiles represented approximately 73% of Decorative Products’ total raw materials purchased on a dollar
basis in 2010 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
7
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. During the second half of 2008, the Company’s Performance
Chemicals segment was successful in enhancing its index pricing through which styrene and butadiene raw materials cost
increases are passed on to customers. Index pricing applies to approximately 65% of Performance Chemicals sales.
Research and Development
The OMNOVA Solutions technology centers in Akron, Ohio, Chester, South Carolina, Shanghai, China and Rayong,
Thailand 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 technologies,
enhancing the functionality of our products in existing applications as well as developing new product and technology
platforms.
Our research and development expenses were $8.8 million in 2010, $8.2 million in 2009 and $10.3 million in 2008.
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. These statements, as
well as any verbal statements by the Company related to this Annual Report are intended to qualify for the protections
afforded forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements
reflect management’s current expectation,
judgment, belief, assumption, estimate or forecast about future events,
circumstances or results and may address business conditions and prospects, strategy, capital structure, sales, profits,
earnings, markets, products, technology, operations, customers, raw materials, financial condition, and accounting policies
among other matters. Words such as, but not limited to, “will,” “may,” “should,” “projects,” “forecasts,” “seeks,”
“believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “optimistic,” “likely,” “would,” “could,”
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 or proposes to operate. Other risks and uncertainties are more
specific to the Company’s businesses including businesses the Company acquires. The occurrence of risks and uncertainties,
and the impact of such occurrences, is often not predictable or within the Company’s control. Such impacts may adversely
affect the Company’s results and, in some cases, such effect could be material. Certain risks and uncertainties facing the
Company are described below or elsewhere in this Annual Report.
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 risks, uncertainties 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
8
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.
Risks and uncertainties that may cause actual results to differ materially from expected results include, among others:
We are exposed to general economic, business and industry conditions. A significant or prolonged downturn
could adversely affect demand for our products.
We are exposed to general economic, business and industry conditions, both in the United States and in global
markets. 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 sufficient 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.
Specifically, Performance Chemicals uses monomers such as styrene, butadiene, and acrylates extensively in its products,
and Decorative Products uses PVC, plasticizer and Ti02 extensively in its products. If we are unable to pass along increased
raw material 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 material prices on to our customers in the form of price increases, historically there has been a time
delay between increased raw material 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 competitive pricing pressure and other factors.
We generally have multiple global sources of supply for our raw materials. However, in some cases there are a limited
number of suppliers that are capable of delivering raw materials that meet our standards. Further industry consolidation may
limit the number of these suppliers. Various factors, including feed stock shortages, production disruptions, the financial
stability of our suppliers, and supplier commitments to others have reduced and eliminated, and in the future may reduce or
eliminate, the availability of certain 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 reduced, disrupted or delayed, our
results could be adversely affected.
Consolidation of our customers and competitors has created increased pricing pressure. If we are required to
reduce our prices 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
decreases, 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.
It is important for our business to have the ability to develop, introduce, sell 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.
We are exposed to credit risk from our customers.
If our customers, and in particular, large customers, are unable to timely pay amounts due to us, it may adversely affect
our results and cash flows and our ability to remain in compliance with our credit facilities.
9
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, any one of these large customers could
adversely affect our results.
Our customers and suppliers may not be able to compete against increased foreign competition which could
adversely affect the demand for our products, the cost of our raw materials and our results.
Our United States and European customers and suppliers are subject to increasing foreign competition. If the demand
for products manufactured in those regions declines then the demand for our products manufactured in those regions could
decline, adversely affecting our results.
Our business could be adversely affected by risks typically encountered by international operations.
We conduct our business in many countries outside of the United States and are subject to risks associated with
international operations, including the following:
(cid:129) fluctuations in currency exchange rates;
(cid:129) transportation delays and interruptions;
(cid:129) political and economic instability and disruptions;
(cid:129) the imposition of duties and tariffs;
(cid:129) import and export controls;
(cid:129) government control of capital transactions, including the borrowing of funds for operations or the expatriation of
cash;
(cid:129) the risks of divergent business expectations or cultural incompatibility;
(cid:129) difficulties in staffing and managing multi-national operations;
(cid:129) limitations on our ability to enforce legal rights and remedies;
(cid:129) more stringent environmental, health and safety laws and regulations; and
(cid:129) potentially adverse tax consequences.
Any of these events could adversely affect our international operations and our results. These risks may intensify given
Eliokem’s substantial international operations.
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 SixSigma, global supply chain
management, Enterprise Resource Planning (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 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.
10
From time to time, we participate in joint ventures whose success depends on performance of a joint venture
partner. The failure of a partner to fulfill its obligations 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.
We may not be able to successfully integrate acquisitions, including Eliokem, into our operations, which could
adversely affect our business.
The integration of acquisitions into our operations involves a number of risks, including:
(cid:129) difficulty integrating operations and personnel at different locations;
(cid:129) diversion of management attention;
(cid:129) potential disruption of ongoing business because of the unknown reactions to the combination of OMNOVA and the
acquisition by customers, suppliers and other key constituencies;
(cid:129) difficulties in assimilating the technologies and products of the acquisition;
(cid:129) inability to retain key personnel;
(cid:129) inability to successfully incorporate acquired business components with our existing operational and accounting
infrastructure;
(cid:129) difficulty in expanding product manufacturing to new sites; and
(cid:129) inability to maintain uniform standards, controls, procedures and policies.
If we are unable to effectively integrate operations and personnel in a timely and efficient manner after an acquisition is
completed, we may not realize the financial or other benefits expected from the acquisition. Failure to overcome these risks
or any other problems encountered in connection with the acquisition could slow our growth or lower the quality of our
products, which could reduce customer demand and adversely affect our results.
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.
11
We are and expect to continue to be subject to increasingly stringent environmental and health and safety laws and
regulations. Non-compliance with these requirements may result in significant fines or penalties, or limitations on our
operations. Such regulation could also restrict or prohibit the use of key raw materials or the sale of our products. Significant
restrictions on or the prohibition of the use of key raw materials or the sale of our products could adversely affect our results.
liability for
Certain environmental requirements provide for strict and, under certain circumstances,
investigation and remediation of releases of regulated materials into the environment at or from properties owned or
operated by us or our predecessors (including Eliokem) or at or from properties where substances were sent for off-site
treatment or disposal. 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. Continued compliance could result in significant increases in
capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising out of a release of
regulated materials by us or our predecessors (including Eliokem) or out of a discovery of previously unknown conditions,
more aggressive enforcement actions or new requirements, could adversely affect our results. Additionally, any such
increase in costs or unanticipated liabilities may exceed our reserves, which could adversely affect our results.
joint and several
Capital expenditures could be higher than expected.
Unanticipated maintenance issues, changes in government regulations, or significant technology shifts could result in
higher than anticipated capital expenditures, which could impact our debt and cash flows.
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 certain of 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 decade.
Accordingly, as general health care costs increase, our health care expenses may also increase. Such increase in costs could
adversely affect our results.
Some of our employees are covered by collective bargaining agreements. The failure to renew any of those
agreements on terms acceptable to us could increase cost or result in a prolonged work stoppage, which could
adversely affect our results.
Approximately 350 or about 14% of our United States employees are covered by collective bargaining agreements of
which approximately 100 employees are covered by agreements that expire within the next 12 months. On May 20, 2010,
approximately 180 Columbus, Mississippi employees represented by United Steelworkers Local #748-L voted against
ratification of a new contract proposal and subsequently went on strike on May 21, 2010. There can be no assurance that any
of our collective bargaining agreements, including the agreement covering our employees in Columbus, Mississippi, will be
renewed on similar terms or renegotiated on terms acceptable to us. Any prolonged work stoppages in one or more of our
facilities could adversely affect our results. The Company has continued operating the Columbus, Mississippi facility using
salaried employees and locally hired replacement employees with no disruption of service to our customers.
Our pension plan is underfunded, requiring company contributions.
The amount of these contributions depends on plan performance, interest rates, pension funding legislation and other
factors. We currently anticipate that we will be required under the Pension Protection Act of 2006 to make a contribution to
our pension plan in 2011 of approximately $2.8 million.
In addition, we cannot predict whether changing conditions
including interest rates, pension assets performance, discount rates, government regulation or other factors will require us to
make contributions in excess of our current expectations. Additionally, we may not have the funds necessary to meet future
minimum pension funding requirements.
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
12
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 us to
protect our proprietary information could make us less competitive and could adversely affect our results.
From time to time, we may be subject to claims or allegations that we infringe or misappropriate the intellectual
property of third parties. Defending against such claims is costly and intellectual property litigation often involves complex
questions of law, and facts and results are unpredictable. We may be forced to acquire rights to such third-party intellectual
property on unfavorable terms (if rights are made available at all), pay damages, modify accused products to be
non-infringing and/or stop selling the applicable product. Regardless of the outcome, defending against allegations of
intellectual property infringement or misappropriation can divert the time and attention of management. Any of the
foregoing could have a negative effect on our competitiveness and our results.
We could be subject to an adverse litigation judgment or settlement which could adversely affect our results.
From time to time, we are subject to various claims, proceedings and lawsuits related to products, services, contracts,
employment, environmental, safety, intellectual property and other matters arising out of our business or that of our
predecessors (including Eliokem). The ultimate resolution of such claims, proceedings, and lawsuits is inherently
unpredictable and, as a result, our estimates of liability, if any, are subject to change and actual results may materially differ
from our estimates. In addition, if there is an unfavorable resolution of a matter, there could be a material adverse effect on
our financial condition, results of operations or cash flows depending on the amount of such resolution in comparison to our
financial condition, results of operations and cash flows in the period in which such resolution occurs. Moreover, there can
be no assurance that we will have any or adequate insurance coverage to protect us from any adverse resolution.
We maintain cash balances in foreign financial institutions.
While we monitor the financial institutions that we maintain accounts with, we cannot be assured that we would be able
to recover our funds in the event that the financial
In addition, we may be limited by foreign
governments in the amount and timing of funds to be repatriated from foreign financial institutions. As a result, this could
adversely affect our ability to fund normal operations, capital expenditures, or service debt.
institution would fail.
Our substantial debt could adversely affect our financial health and prevent us from fulfilling our obligations.
We have substantial debt and, as a result, significant debt service obligations. Our substantial debt could:
(cid:129) make it more difficult for us to satisfy our obligations with respect to the notes, the term loan and the revolving credit
facility;
(cid:129) increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations,
because a portion of our borrowings, including those under the term loan and the revolving credit facility, are at
variable rates of interest;
(cid:129) require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby
reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, joint ventures,
pension contributions and investments and other general corporate purposes;
(cid:129) limit our flexibility in planning for, or reacting to, changes in our business and the product categories in which we
participate;
(cid:129) limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in
our debt agreements;
(cid:129) place us at a competitive disadvantage compared to our competitors that have less debt.
Our ability to make scheduled payments on or to refinance our debt obligations and to fund planned capital
expenditures and expansion efforts and any acquisitions we may make in the future depends on our ability to generate cash
13
in the future and our financial condition and operating performance, which are subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond our control. We could be required to
obtain the consent of the lenders under our new term loan and our new revolving credit facility to refinance material
portions of our debt, including the notes. We may not be able to maintain a level of cash flows from operating activities
sufficient to permit us to pay the principal, premium, if any, and interest on our debt.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce
or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our debt.
These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If
our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial
liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other
obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from
them, and these proceeds may not be adequate to meet any debt service obligations then due. Additionally, the
agreements governing our term loan and our revolving credit facility and the indenture governing the notes will limit the use
of the proceeds from any disposition; as a result, we may not be allowed, under these documents, to use proceeds from
such dispositions to satisfy all current debt service obligations. Further, we may need to refinance all or a portion of our debt
on or before maturity, and we cannot assure that we will be able to refinance any of our debt on commercially reasonable
terms or at all.
Despite our current debt levels, we and our subsidiaries may still incur significant additional debt. Incurring
more debt could increase the risks associated with our substantial debt.
We and our subsidiaries may be able to incur substantial additional debt, including additional secured debt, in the
future. The terms of the note indenture restrict, and the agreements governing our new term loan and our new revolving
credit facility restrict, but will not completely prohibit, us from incurring substantial additional debt. In addition, the note
indenture will allow us to issue additional notes under certain circumstances, which will also be guaranteed by our domestic
subsidiaries. The note indenture will also allow us to incur certain other additional secured debt. Non-guarantor subsidiaries,
which includes our foreign subsidiaries may incur additional debt under the note indenture, which debt (as well as other
liabilities at any such subsidiary) would be structurally senior to the notes. In addition, the note indenture will not prevent us
from incurring certain other liabilities that do not constitute indebtedness (as defined in the note indenture). If new debt or
other liabilities are added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
The indenture governing the notes and the agreements governing our term loan and our revolving credit facility
will impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us
from capitalizing on business opportunities.
The agreements governing our term loan and our revolving credit facility and the indenture governing the notes impose
significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
(cid:129) incur additional debt or issue certain disqualified stock and preferred stock;
(cid:129) pay dividends or certain other distributions on our capital stock or repurchase our capital stock;
(cid:129) make certain investments or other restricted payments;
(cid:129) place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
(cid:129) engage in transactions with affiliates;
(cid:129) sell certain assets or merge with or into other companies;
(cid:129) enter into sale and leaseback transactions;
(cid:129) guarantee debt;
(cid:129) create liens; and
(cid:129) enter into unrelated businesses.
14
Our term loan and revolving credit facility will require us to meet certain financial covenants, including covenants
relating to senior net debt leverage, minimum excess availability and a springing minimum fixed charge coverage ratio if
average excess availability falls below a certain level.
As a result of these covenants and restrictions, we could be limited in how we conduct our business and we may be
unable to raise additional debt or equity financing to compete effectively or to take advantage of new business
opportunities. The terms of any future debt we may incur could include more restrictive covenants. We cannot assure you
that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to
obtain waivers from the lenders and/or amend the covenants.
There will be limitations on our ability to incur the full $100.0 million of commitments under our revolving credit facility.
Borrowings under our new revolving credit facility will be limited by a specified borrowing base consisting of a percentage of
eligible accounts receivable and inventory, less customary reserves. In addition, under our new revolving credit facility, a
quarterly fixed charge maintenance covenant would become applicable if average excess availability under our credit facility
is less than $25.0 million during any fiscal quarter. If the covenant trigger were to occur, the Company would be required to
satisfy and maintain on the last day of each fiscal quarter a fixed charge coverage ratio of at least 1.1x for the last twelve-
month period. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control,
and we cannot assure that we will meet this ratio. A breach of any of these covenants could result in a default under our new
revolving credit facility.
Moreover, our new revolving credit facility provides the lenders considerable discretion to impose reserves, which could
materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the
lenders under our new revolving credit facility will not impose such actions during the term of our new revolving credit
facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our ability to
make interest payments on the notes.
Item 1B. Unresolved Staff Comments
Not Applicable
15
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
Fitchburg, MA
Green Bay, WI
*Hertfordshire, England
Mogadore, OH
*Shanghai, China
Manufacturing Facilities:
Auburn, PA
Columbus, MS
Jeannette, PA
Kent, England
Monroe, NC
*Rayong, Thailand
Shanghai, China
Taicang, China
Sales/Marketing/Design/Distribution:
Akron, OH
*Asnieres, France
*Bangkok, Thailand
*Dubai, UAE
*Hertfordshire, England
*Rayong, Thailand
*Shanghai, China
*Warsaw, Poland
*
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 M to the Consolidated Financial Statements of
this report.
During 2010, 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.
Additionally, as a result of the Eliokem acquisition in December 2010, the Company acquired Eliokem manufacturing
facilities located in LeHavre, France; Akron, Ohio, USA; Ningbo, China; Caojing, China, and Valia, India, as well as the leased
headquarters of Eliokem located in Villejust, France.
Item 3.
Legal Proceedings
From time to time, the Company is subject to various claims, proceedings and lawsuits related to products, services,
contracts, employment, environmental, safety, intellectual property and other matters. The ultimate resolution of such
claims, proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are
subject to change. Actual results may materially differ from the Company’s estimates and an unfavorable resolution of any
matter could have a material adverse effect on the financial condition, results of operations and/or cash flows of the
Company. However, subject to the above and taking into account such amounts, if any, as are accrued from time to time on
the Company’s balance sheet, the Company does not believe, based on the information currently available to it, that the
16
ultimate resolution of these matters will have a material effect on the consolidated financial condition, results of operations
or cash flows of the Company.
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, 2010.
Item 4A. Executive Officers of the Registrant
The following information is given as of January 18, 2010, and except as otherwise indicated, each individual has held
the same office during the preceding five-year period.
Kevin M. McMullen, age 50, 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 52, 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 54, 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 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 54, 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 62, 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 56, 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
17
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).
Jay T. Austin, age 54, Vice President, Global Sourcing and Logistics, of the Company since December 2010. Prior to that
he had served as Vice President, Strategic Sourcing for OMNOVA Solutions since August 2008. Prior to joining the
Company, Mr. Austin had served as Vice President of Global Procurement for ICI Paints (a leading international paint
business) since March 2006 and, prior to that, as Director of Purchasing, North America for The Glidden Company, a division
of ICI Paints, since July 2002.
The Company’s executive officers generally hold terms of office of one year and/or until their successors are elected.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s common stock is listed on the New York Stock Exchange and trades under the symbol OMN. At
November 30, 2010, there were 8,084 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 84 of this report and is incorporated herein by reference. The Company has not declared a dividend
since 2001.
Information concerning long-term debt appears in Note K 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 page 86 and is incorporated herein by
reference.
The following graph compares the cumulative five year total return provided shareholders on OMNOVA Solutions Inc.’s
common stock relative to the cumulative total returns of the S&P 500 index and the S&P Industrials index. An investment of
$100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on
11/30/2005 and its relative performance is tracked through 11/30/2010.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among OMNOVA Solutions Inc., The S&P 500 Index
And The S&P Industrials Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
11/05
11/06
11/07
11/08
11/09
11/10
OMNOVA Solutions Inc.
S&P 500
S&P Industrials
*The stock price performance included in this graph is not necessarily indicative of future stock price performance.
19
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, 2010, 2009, 2008, 2007, 2006 and for each of the five years in the period ended November 30, 2010 are
derived from the Company’s audited consolidated financial statements.
Statement of operations data:
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold(1)
$846.2
684.8
$696.4
536.7
$869.4
731.4
$745.5
605.2
$699.1
549.2
2010
2009
2008
2007
2006
(Dollars in millions, except per share data)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite lived trademark impairments(2)
. . . . . . . . . . . . . . . . . . . . . . . .
Fixed asset impairment(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity (earnings) loss in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt offering and redemption expense(5) . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expense(6) . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net(1)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations before income taxes . . . . . . . . .
Income tax expense (benefit)(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operations, net of tax:
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.4
99.6
20.6
—
6.2
.6
8.7
—
—
5.5
1.7
159.7
99.9
22.9
—
1.1
2.1
8.1
—
—
—
(2.3)
138.0
104.8
23.9
—
—
.6
13.0
(.2)
—
—
(2.1)
140.3
99.1
20.1
—
—
1.0
16.5
(1.2)
12.4
—
(.7)
142.9
131.8
140.0
147.2
18.5
(89.4)
107.9
—
—
—
27.9
1.7
26.2
—
—
—
(2.0)
.2
(2.2)
—
—
—
(6.9)
.1
(7.0)
.3
—
.3
149.9
105.6
20.2
1.0
.1
1.3
21.3
(2.3)
—
—
(.6)
146.6
3.3
.1
3.2
(.1)
18.2
18.1
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107.9
$ 26.2
$ (2.2) $ (6.7)
$ 21.3
Basic income (loss) per share:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.42
—
$
.59
—
$ (.05) $ (.17)
.01
—
$
.08
.44
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.42
$
.59
$ (.05) $ (.16)
$
.52
Diluted income (loss) per share:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.40
—
$
.59
—
$ (.05) $ (.17)
.01
—
$
.08
.43
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.40
$
.59
$ (.05) $ (.16)
$
.51
General:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(7)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14.8
$726.0
$389.4
$328.7
$ 10.4
$338.0
$140.8
$ 41.5
$ 14.8
$351.6
$182.1
$ 17.4
$ 16.2
$326.4
$144.6
$ 12.6
$ 13.0
$338.9
$165.0
$ 26.4
(1) During 2010, the Company recognized strike-related costs of $5.5 million of which $3.3 million is recorded in cost of products sold and $2.2 million is recorded
in other (income) expense.
(2) During 2006, the Company recorded indefinite-lived intangible asset impairment charges of $1.0 million.
(3) During 2010, the Company recorded asset impairment charges of $6.2 million to write-down machinery and equipment at its Columbus, Mississippi plant to fair
value. During 2009, the Company recorded asset impairment charges of $1.1 million related to assets that would no longer be utilized due to moving certain
production to other facilities.
20
(4) Restructuring and severance consisted primarily of severance costs of $0.6 million in 2010, $2.1 million in 2009, costs for the closure of an extrusion facility and
severance costs in 2008, severance costs in 2007, severance costs and asset write-downs and costs for the closure of a European sales office in 2006.
(5) 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.
(6) During 2010, the Company recognized acquisition and integration costs of $5.5 million related to the pending purchase of Eliokem International SAS, which was
acquired on December 9, 2010.
(7) During 2010, in connection with the pending acquisition of Eliokem International SAS, the Company issued $250 million of Senior Notes, the proceeds of which
were held in escrow as of November 30, 2010, and subsequently used on December 9, 2010 to fund the acquisition.
(8) During 2010, the Company recorded a charge of $9.2 million for a fair value adjustment on a foreign currency collar and recorded a gain of $9.7 million from the
dissolution of a joint venture marketing alliance
(9) During 2010, the Company reversed a significant portion of its deferred tax valuation allowance of $98.2 million.
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 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, construction, oil/gas drilling services, adhesives, tape, tire cord, floor polish, textiles,
graphic arts, plastic parts, bio-based polymers and various other specialty applications. The Decorative Products segment
develops, designs, produces and markets a broad line of functional and decorative surfacing products, including commercial
wallcoverings, coated fabrics, performance fabrics, printed and solid color surface laminates and performance films. These
products are used in numerous applications,
remodeling and new
construction; kitchen and bath cabinets; transportation including automotive, bus and other mass transit, marine and
motorcycle; recreational vehicles and manufactured housing; flooring; commercial and residential furniture; retail display
fixtures; home furnishings and consumer electronics; and performance films for pool liners, banners, tents, ceiling tiles and
medical devices. 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.
including commercial building refurbishment,
The Company’s products are sold to manufacturers, independent distributors and end users directly and through
agents.
The Company has strategically located manufacturing facilities in the United States, United Kingdom, China and
Thailand.
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 and unprofitable 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 authoritative guidance promulgated by the Financial
Accounting Standards Board (“FASB”). 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 O of the Company’s Consolidated Financial Statements.
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
21
industries which provide a general indication of demand drivers to the Company include paper, commercial and residential
construction and refurbishment, automotive, 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.
Key operating measures utilized by the business segments include orders, sales, working capital turnover, inventory,
productivity, new product vitality, cost of quality 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, adjusted operating profit, adjusted net income, consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) as set forth in the Net Leverage Ratio in the Company’s $150,000,000 Term Loan
Credit Agreement, working capital, operating cash flows, capital expenditures and adjusted earnings per share, including
applicable ratios such as inventory turnover, working capital turnover, return on sales and assets and leverage ratios. These
measures, as well as objectives established by the Board of Directors of the Company, are reviewed at monthly, quarterly
and annual intervals and compared with historical periods.
Results of Operations of 2010 Compared to 2009
The Company’s net sales in 2010 were $846.2 million compared to $696.4 million in 2009. The Company’s Performance
Chemicals business segment revenue increased by 33.0% and the Decorative Products business segment revenue increased
6.2%. Contributing to the sales increase in 2010 were higher volumes of $56.2 million, increased pricing of $89.6 million and
favorable foreign exchange translation of $4.0 million.
Gross profit in 2010 was $161.4 million with a gross profit margin of 19.1% compared to gross profit of $159.7 million
and a gross profit margin of 22.9% in 2009. Gross profit margins declined due to the impact of Performance Chemicals index
pricing, in which raw material costs are passed on to the customer without margin benefit, raw material costs exceeding new
pricing in Decorative Products and changes in product mix. Also included in gross profit for 2010 were $6.5 million of strike-
related and net retirement benefit plan curtailment charges.
Selling, general and administrative expenses in 2010 were $99.6 million, or 11.8% of sales, compared to $99.9 million, or
14.3% of net sales in 2009. Despite rising volumes, selling, general and administrative expense decreased due to the
Company’s focused cost controlling efforts.
Interest expense was $8.7 million for 2010 compared to $8.1 million in 2009. Included in 2010 is $1.6 million of additional
interest expense relating to the Company’s $250 Million Senior Notes which were issued on November 3, 2010 in connection
with the Company’s pending acquisition of Eliokem International SAS (“Eliokem”) (see Debt and Purchase Transaction). The
effective interest rate on the Company’s debt was 4.9% and 4.5% for 2010 and 2009, respectively. Total debt at
November 30, 2010 was $394.2 million compared to $144.1 million at November 30, 2009. Total cash, which included
proceeds from the Senior Notes which were held in escrow until the completion of the acquisition, was $328.7 million at
November 30, 2010 and $41.5 million at November 30, 2009.
Other expense was $1.7 million in 2010 compared to income of $2.3 million in 2009. Expense items included in 2010
were a fair value adjustment expense of $9.2 million related to a Euro currency option collar which the Company put in place
to hedge currency risk for the pending Eliokem acquisition, strike-related costs of $2.2 million, losses on foreign currency
transactions of $0.8 million and a customs duty settlement of $0.3 million. These expense items were partially offset by a
gain of $9.7 million related to the dissolution of the Company’s joint venture marketing alliance with Rohm and Haas
Company and a net gain of $0.7 million on the reversal of indemnification obligations.
Other income in 2009 included flood-related costs of $0.6 million, foreign currency transaction gains of $0.5 million,
licensing revenue of $0.4 million and a gain of $0.3 million on the reversal of an indemnification obligation.
22
There was an income tax benefit of $89.4 million in 2010 and income tax expense was $1.7 million in 2009. The benefit in
2010 was primarily related to the reversal of $98.2 million of the Company’s U.S. deferred tax valuation allowance partially
offset by tax expense of $8.8 million related to U.S. and foreign related income taxes. Prior to 2010, valuation allowances had
been provided for deferred tax assets in the U.S. as a result of the Company’s prior losses, uncertainty of predicting future
taxable earnings due to market demand, and price and raw material cost volatility. The Company has determined in 2010
that it is more likely than not that it will realize the future benefits of its net operating loss carryforwards and accordingly, has
reversed a significant portion of its tax valuation allowance. The Company’s effective rate was (483.2)% in 2010. Excluding the
reversal of the U.S. valuation allowance, the effective rate was 47.6% compared to the U.S. statutory rate of 35%. The higher
rate in 2010 is primarily due to acquisition costs of $3.1 million which are non-deductible for tax purposes, utilization of state
net operating loss carryforwards (“NOLC”) of $1.5 million and a change in the state tax rate applied to deferred tax assets.
At present, the Company has $118.9 million of domestic federal net operating loss carryforwards that expire from 2021
through 2028, which could be used to offset future cash taxes.
The Company generated net income of $107.9 million or $2.40 per diluted share in 2010 compared to net income of
$26.2 million or $0.59 per diluted share in 2009.
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 (loss) to
consolidated income before income taxes:
Year Ended
November 30,
2010
2009
(Dollars in millions)
Segment Sales:
Performance Chemicals
Paper and Carpet Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$330.1
197.8
$249.2
147.6
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$527.9
$396.8
Decorative Products
Commercial Wallcovering and Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$219.9
98.4
$217.7
81.9
Total Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
318.3
299.6
Consolidated net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$846.2
$696.4
Segment Gross Profit:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$104.4
57.0
$ 90.8
68.9
Consolidated Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$161.4
$159.7
Segment Operating Profit (Loss):
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 73.3
(18.0)
(8.7)
(28.1)
$ 48.0
1.6
(8.1)
(13.6)
Consolidated income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18.5
$ 27.9
23
Performance Chemicals
Performance Chemicals’ net sales increased $131.1 million, or 33.0%, to $527.9 million during 2010 compared to
$396.8 million during 2009. The higher sales were driven by stronger volume of $45.8 million and higher selling prices of
$85.3 million. Paper and Specialty Chemicals volumes were up year over year but Carpet Chemicals volumes were down. Net
sales for the Paper and Carpet Chemicals product line increased $80.9 million to $330.1 million during 2010 compared to
$249.2 million during 2009. Net sales for the Specialty Chemicals product line increased $50.2 million to $197.8 million
during 2010 compared to $147.6 million during 2009.
Performance Chemicals’ gross profit in 2010 was $104.4 million with a gross profit margin of 19.8% compared to
$90.8 million and a gross profit margin of 22.9% in 2009. While gross profit dollars improved by 15.0%, the decline in gross
profit margin was primarily due to the effect of index pricing, in which higher raw material costs of $83.5 million were passed
through without any gross margin benefit.
This segment generated an operating profit of $73.3 million in 2010. Included in the operating profit is the gain of $9.7
million for the dissolution of the RohmNova joint venture in the second quarter of 2010. Excluding this gain, operating profit
would have been $63.6 million for 2010 compared to $48.0 million in 2009, an improvement of 32.5%. The increase in
segment operating profit was primarily due to higher volumes of $14.6 million, and $6.3 million of lower manufacturing cost,
SG&A and other expense. Higher pricing of $85.3 million was mostly offset by higher raw material costs of $83.5 million.
Additionally, this segment recorded LIFO expense of $2.8 million in 2010 compared to LIFO income of $5.3 million in 2009.
Segment operating profit also includes other items which management excludes when evaluating the results of the
Company’s segments. Those items for 2010 include workforce reduction costs of $0.4 million and a defined benefit pension
plan curtailment charge of $0.1 million and for 2009, asset write-offs of $0.6 million, workforce reduction costs of $0.2 million
and a defined benefit pension plan curtailment charge of $0.2 million.
During May 2010, the Company acquired certain intangible assets of The Dow Chemical Company’s hollow plastic
pigment product line for $2.5 million. Those intangible assets included patents, trademarks and customer lists. The purchase
of these intangible assets will allow the Company to enhance its leading product offering to the coated paper and
paperboard industry and provide an opportunity for growth in other applications.
In accordance with the applicable
accounting guidance, the Company determined the fair value of these assets to be $2.5 million on the acquisition date.
Decorative Products
Decorative Products net sales increased $18.7 million, or 6.2%, to $318.3 million in 2010 from $299.6 million in 2009
primarily due to improved volumes of $10.4 million, higher pricing of $4.3 million and currency translation effects of
$4.0 million. Commercial Wallcovering and Coated Fabrics net sales were $219.9 million in 2010 compared to $217.7 million
in 2009. Net sales for the Laminates and Performance Films product line increased to $98.4 million during 2010 compared to
$81.9 million during 2009.
Decorative Products’ gross profit was $57.0 million with a gross profit margin of 17.9% during 2010 compared to
$68.9 million and a gross profit margin of 23.0% in 2009. The decrease in gross profit margin is primarily due to higher raw
material costs of $13.3 million, strike-related costs of $3.3 million at the Company’s Columbus, Mississippi plant, product mix
and higher manufacturing costs of $1.7 million.
This segment had an operating loss of $18.0 million for 2010. Included in the operating loss are several charges related
to the Columbus, Mississippi facility including a non-cash asset impairment charge of $6.2 million for the write-down of
machinery and equipment to fair value, strike-related costs of $5.5 million and a non-cash pension plan curtailment charge of
$3.2 million. The impairment was caused by the loss of business from weaker market conditions for commercial wallcovering
which is not expected to recover to historical levels and transfer of certain products to other Company facilities to better
meet customer demand. The assets were written down to their estimated fair value using a cost approach. Excluding the
above items, segment operating loss would have been $3.1 million compared to an operating profit of $1.6 million in 2009.
The decrease in segment operating profit was primarily due to higher raw material costs of $13.3 million, higher
24
manufacturing, overhead and other costs of $1.7 million and foreign exchange transaction losses of $1.3 million, partially
offset by higher volumes of $7.8 million and higher pricing of $4.3 million. Additionally, this segment recorded a LIFO
inventory charge of $0.8 million in 2010 compared to LIFO income of $0.7 million in 2009. Segment operating profit also
includes other items which management excludes when evaluating the results of the Company’s segments. Those items for
2010 included a foreign import duty claim of $0.3 million, a reversal of an indemnification receivable of $0.3 million, legal
settlement expense of $0.3 million and workforce reduction costs of $0.2 million and for 2009, a pension curtailment gain of
$0.7 million, flood-damage costs of $0.6 million, workforce reduction costs of $1.8 million, asset impairment charges of
$0.5 million and a reversal of an indemnification receivable of $0.3 million.
Interest and Corporate
Interest expense was $8.7 million in 2010 compared to $8.1 million for 2009. The increase was primarily due to
$1.6 million of interest expense on the 7 7⁄ 8% Senior Notes which were issued on November 3, 2010 in connection with the
Company’s pending acquisition of Eliokem International SAS (see Debt and Purchase Transaction) and held in escrow until
the acquisition was completed on December 9, 2010.
Corporate expenses were $28.1 million in 2010 compared to $13.6 million in 2009. The increase is primarily due to a
$9.2 million charge for a fair value adjustment for a Euro currency option collar which was related to the Eliokem acquisition
and was settled with the counter-party on December 1, 2010 and acquisition and integration related costs for the acquisition
of Eliokem of $5.5 million.
Results of Operations of 2009 Compared to 2008
The Company’s net sales in 2009 were $696.4 million as compared to $869.4 million in 2008. The Company’s
Performance Chemicals business segment revenue decreased by 23.9% and the Decorative Products business segment
revenue decreased 13.9%. Contributing to the sales decrease in 2009 were volume declines of $108.6 million or 12.5% as a
result of weak market conditions, lower pricing of $68.7 million as a result of lower raw material costs and unfavorable
foreign exchange translation of $16.1 million, which were partially offset by additional sales of $20.4 million from the
Decorative Products Asian operations. The Decorative Products Asian operations were acquired on December 31, 2007. Net
sales in 2009 included thirteen months from the Decorative Products Asian operations as compared to 2008, which includes
ten months. The thirteenth month in 2009 resulted in additional net sales and net income of $8.0 million and $0.2 million,
respectively.
Gross profit in 2009 was $159.7 million with a gross profit margin of 22.9% compared to gross profit of $138.0 million
and a gross profit margin of 15.9% in 2008. The improved margin was primarily due to lower costs for raw materials of
$106.8 million and a reduction in manufacturing costs as a result of significant restructurings, cost reduction initiatives, lower
transportation costs and lower costs for resale merchandise.
Selling, general and administrative expenses of $99.9 million in 2009 were $4.9 million, or 4.7% lower than 2008. The
decrease in 2009 was primarily due to a reduction in the number of employees and cost saving initiatives.
Interest expense of $8.1 million in 2009 compared to $13.0 million in 2008. The lower interest expense in 2009 is
primarily due to significantly lower debt levels and lower average interest rates. Total debt at November 30, 2009 was $144.1
million, down $44.2 million from November 30, 2008.
Other (income)/expense, net was $(2.3) million in 2009 and $(2.1) million in 2008. Included in 2009 are flood related costs
of $0.6 million net of insurance proceeds.
Income tax expense was $1.7 million in 2009 compared to a tax expense of $0.2 million in 2008. The tax expense in 2009
was primarily related to foreign income taxes as a result of improved earnings, a provision for Alternative Minimum Tax
(“AMT”) expense of $0.2 million and state and local income taxes of $0.2 million. The effective rates of 6.4% in 2009 and
6.4% in 2008 were below the U.S. statutory rate of 35% primarily due to the utilization of tax loss carryforwards. Valuation
25
allowances have been provided for deferred tax assets in the U.S. as a result of the Company’s prior losses and the
uncertainty of predicting future taxable earnings due to price and raw material cost volatility. At present, the Company has
$131.8 million of domestic federal net operating loss carryforwards that expire by 2030.
The Company had net income of $26.2 million, or $0.59 per diluted share, in 2009 compared to a net loss of $2.2 million,
or $0.05 per diluted share, in 2008. The increase in net income was primarily due to margin improvement, cost reductions,
lower interest expense and improved Asian business performance.
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) before income taxes:
Year Ended
November 30,
2009
2008
(Dollars in millions)
Segment Net Sales:
Performance Chemicals
Paper and Carpet Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$249.2
147.6
$337.0
184.6
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$396.8
$521.6
Decorative Products
Commercial Wallcovering and Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$217.7
81.9
$252.2
95.6
Total Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299.6
347.8
Consolidated net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$696.4
$869.4
Segment Gross Profit:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 90.8
68.9
$ 68.3
69.7
Consolidated Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$159.7
$138.0
Segment Operating Profit (Loss):
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48.0
1.6
(8.1)
(13.6)
$ 25.2
(6.5)
(13.0)
(7.7)
Consolidated profit (loss) from continuing operations before income tax . . . . . . . . . . . . . . . . . . . .
$ 27.9
$ (2.0)
Performance Chemicals
Performance Chemicals’ net sales decreased 23.9% to $396.8 million during 2009 compared to $521.6 million during
2008, driven by lower selling prices of $72.0 million as a result of lower raw material costs, volume decreases of $47.2 million
and $5.6 million of unfavorable foreign exchange translation. Net sales for the Paper and Carpet Chemicals product line
decreased to $249.2 million during 2009 compared to $337.0 million during 2008. Net sales for the Specialty Chemicals
product line decreased to $147.6 million during 2009 compared to $184.6 million during 2008.
26
Performance Chemicals’ gross profit was $90.8 million in 2009 with a gross profit margin of 22.9% compared to $68.3
million and a gross profit margin of 13.1% in 2008.
Performance Chemicals generated an operating profit of $48.0 million and an operating profit margin of 12.1% for 2009
compared to $25.2 million and an operating profit margin of 4.8% for 2008. The increase in segment operating profit was
due to lower raw material costs of $98.8 million, lower transportation and manufacturing costs and other cost reductions of
$3.3 million, partially offset by lower pricing of $72.0 million, lower volumes of $12.0 million and asset write-offs of $0.7
million. Included in 2009 is a decrease in the LIFO reserve, which increased income by $5.4 million.
Decorative Products
Decorative Products’ net sales decreased by 13.9% to $299.6 million in 2009 from $347.8 million in 2008, primarily due to
decreased volumes of $61.4 million and $10.5 million of unfavorable foreign exchange rates, partially offset by improved
pricing of $3.3 million and additional sales at the Decorative Products Asian businesses of $20.4 million. Commercial
Wallcovering and Coated Fabrics net sales were $217.7 million during 2009 compared to $252.2 million in 2008. Net sales for
the Laminates and Performance Films product line were $81.9 million during 2009 compared to $95.6 million in 2008.
Decorative Products’ gross profit was $68.9 million with a gross profit margin of 23.0% for 2009 compared to $69.7
million and a gross profit margin of 20.1% for 2008.
Decorative Products generated operating income of $1.6 million with an operating profit margin of 1.0% for 2009
compared to an operating loss of $6.5 million and an operating profit margin of (1.9)% in 2008. The improvement in 2009
was primarily due to improved profit at the Asian businesses of $9.8 million, lower raw material costs of $8.0 million,
improved pricing of $3.3 million and lower health care, utilities, transportation and cost reductions of $5.6 million, partially
offset by lower volume of $16.7 million, flood related costs, net of insurance proceeds, of $0.5 million and higher
restructuring and severance charges of $2.1 million. Included in 2009 is a decrease in the LIFO reserve, which increased
income by $0.7 million.
Interest and Corporate
Interest expense decreased to $8.1 million in 2009 from $13.0 million in 2008. The lower interest expense in 2009 is
primarily due to significantly lower debt levels and lower average interest rates.
Corporate expense increased to $13.6 million in 2009 from $7.7 million in 2008, primarily due to higher compensation
expenses as a result of the increase in the Company’s stock price and the achievement of certain operating result metrics.
Included in 2009 is a pension plan curtailment gain of $0.4 million and included in 2008 is a gain of $0.4 million related to a
settlement with an insurer.
Subsequent Event—Purchase Transaction
On December 9, 2010, the Company completed the acquisition of all the outstanding shares of Eliokem International
SAS (“Eliokem”) from AXA Investment Managers Private Equity Europe and the other holders of equity securities of Eliokem
for an aggregate purchase price of $299.7 million in cash, subject to working capital and capital expenditure adjustments.
The Company used cash on hand, the net proceeds from the issuance of its 7.875% Senior Notes due 2018 (“Senior Notes”)
and proceeds from a new $200 million Term Loan to fund the acquisition, including the repayment of Eliokem debt. The
balance of the proceeds were used for repayment of the Company’s existing term loan (see Debt section) and related costs.
Costs associated with the Senior Note issuance and the Eliokem acquisition included in the Company’s results for 2010
include $5.5 million of acquisition and integration expenses and an additional $1.6 million of interest expense on the Senior
Notes. Additionally, in the first quarter of 2011, the Company expects to write off $1.1 million of deferred financing fees
related to the $150 million Term Loan B.
Eliokem is a worldwide manufacturer of specialty chemicals used in a diverse range of niche applications including
coating resins, elastomeric modifiers, antioxidants, oilfield chemicals and latices for specialty applications. Eliokem is
headquartered in Villejust, France and has facilities located in France, the United States, China and India.
27
The transaction will be accounted for under acquisition accounting using the fair value concepts defined in ASC
Subtopic 820-10, “Fair Value Measurements and Disclosures.” ASC Subtopic 805-10, ”Business Combinations” requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The preliminary estimate of the fair values of assets acquired and liabilities to be assumed as of the closing of the
Acquisition were allocated to each of Eliokem’s assets, liabilities and identifiable intangible assets. The excess of purchase
price over the estimated fair values of assets acquired and liabilities assumed is allocated to goodwill.
The preliminary estimate of the fair values of assets acquired and liabilities assumed (in millions) is as follows:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
$117.5
118.8
80.7
3.3
.6
81.2
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
402.1
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(50.3)
(44.2)
(7.9)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$299.7
The preliminary allocation of the purchase price is based on preliminary estimates of the fair value of assets acquired
and liabilities assumed, and the related income tax impact of the acquisition accounting adjustments. The Company is in the
process of determining the final working capital adjustment, the fair value of tangible and intangible assets acquired as well
as evaluating the impact of historical tax attributes and the related impact on the preliminary purchase price allocation. The
final fair valuations may be different from the preliminary valuations. The final allocation of the purchase price will be
determined after completion of a final analysis to determine the fair values of the tangible assets, identifiable intangible
assets, and liabilities as of the date the acquisition is complete. Increases or decreases in the fair value of the net assets may
change the amount of the purchase price allocated to goodwill and other assets and liabilities. Goodwill arising from the
acquisition is primarily attributable to many factors including synergies expected from combining the operations of Eliokem
with our existing Performance Chemicals operations as well as benefits derived from expansion of Performance Chemicals’
manufacturing capabilities.
The preliminary estimated fair value of the identifiable intangible assets and their weighted-average useful lives have
been estimated as follows (dollars in millions):
Estimated
Fair Value
Estimated
Useful Life
Definite lived assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.2
36.2
12.4
13 years
10 –14 years
4 – 14 years
Total definite lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.8
Indefinite lived assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.9
N/A
Total identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$80.7
Definite lived intangible assets will be amortized over their estimated useful lives. Intangible assets with indefinite useful
lives and goodwill will not be amortized but will be tested for impairment at least annually.
28
The unaudited pro forma effect of the acquisition of Eliokem on the Company’s net sales, net income and net income
per share, had the acquisition occurred on December 1, 2008 and 2009, respectively, is as follows:
Year Ended November 30,
2010
2009
(Dollars in millions,
except per share
amounts)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,134.6
$ 102.9
2.31
$
2.29
$
$920.1
$ 24.6
.56
$
.56
$
Financial Resources and Capital Spending
The following table reflects key cash flow measures from continuing operations:
2010
2009
2008
(Dollars in millions)
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by (used) in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.0
$ 17.6
$ 74.2
$(259.8) $ (9.0) $(40.0)
$(44.2) $ 35.0
$ 250.0
$ 4.8
$ 24.1
$ 34.1
Cash provided by operating activities was $45.0 million in 2010, $74.2 million in 2009, and $17.6 million in 2008. Cash
provided by operations decreased in 2010 primarily due to lower pre-tax profitability (partially as a result of strike-related
and acquisition related costs) and a reduction in funds provided from working capital compared to 2009 primarily to an
increase in inventory due to higher prices. Cash provided by operations increased in 2009 primarily due to improved
profitability and a decrease in working capital. Days Sales Outstanding (“DSO”) was 50.1 days in 2010 compared to 49.9 days
during 2009 and 48.1 days during 2008. The increase from 2008 is primarily due to an increase in foreign sales which have a
longer collection period and extended terms.
Cash used in investing activities was $259.8 million in 2010, compared to $9.0 million in 2009 and $40.0 million in 2008.
Included in 2010 was restricted cash of $253.1 million. Restricted cash consisted of $250.0 million in proceeds from the
issuance of the Senior Notes and certain debt issuance fees, which were placed in an escrow account until the completion of
the acquisition of Eliokem and refinancing of the Company’s existing debt on December 9, 2010. 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
the Company incurred $14.8 million of capital
expenditures in 2010, $10.4 million in 2009 and $14.8 million in 2008. Capital expenditures were made and are planned
principally for asset replacement, new product capability, cost reduction, safety and productivity improvements and
environmental protection.
its revolving credit facility. Additionally,
Cash provided by financing activities in 2010 was due to the issuance of $250 million principal amount of Senior Notes.
The proceeds of the Senior Notes were held in escrow as of November 30, 2010. On December 9, 2010, the Company used
the proceeds, along with existing cash and a refinancing and upsizing of the Company’s Term Loan B (as described under
Debt and Purchase Transaction) from $150 million to $200 million, to complete the acquisition of Eliokem. Cash used in
financing activities was $44.2 million in 2009 primarily due to debt repayments. Cash provided by financing activities in 2008
was $35.0 million. Total debt was $394.2 million as of November 30, 2010, which includes the Senior Notes, compared to
$144.1 million as of November 30, 2009 and $188.3 million as of November 30, 2008. Included in 2008 are borrowings of
$29.0 million used to fund the purchase of the Decorative Products Asian businesses.
29
Debt
Amounts due banks consist of the following debt obligations that are due within the next twelve months:
Term Loan B – current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign subsidiaries borrowings (interest at 5.1% – 5.3%)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
2009
(Dollars in millions)
$1.5
3.3
$4.8
$1.5
1.8
$3.3
Total foreign availability at November 30, 2010 was $7.1 million, of which $3.3 million was outstanding. Foreign
subsidiaries’ borrowings are secured by equipment, buildings and land use rights of the foreign subsidiaries. In addition, the
Company has additional foreign credit facilities for the issuance of letters of credit of $5.7 million. Outstanding letters of
credit on this facility were $0.1 million at November 30, 2010.
The Company’s long-term debt consists of the following:
Term Loan B (interest at 2.8%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Unsecured Notes (interest at 7.875%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Revolving Credit Facility (interest at 1.5%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
2009
(Dollars in millions)
$140.9
250.0
—
390.9
1.5
$142.3
—
—
142.3
1.5
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$389.4
$140.8
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 $1.5 million were paid in both 2009 and 2008 and the 2007 excess cash flow payment of $3.9 million
was paid during 2008. The Company was not required to pay an excess cash flow payment for 2009 or 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 requires the Company to maintain an interest rate swap with a notional amount
of at least $50 million. Additionally, the Term Loan provides for additional borrowings of the greater of $75 million or an
amount based on a senior secured leverage ratio, as defined in the Term Loan, $75 million, provided that certain
requirements are met including an interest coverage ratio. The Company has not utilized these additional borrowings as of
November 30, 2010. 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, 2010, the Company was in compliance with this
requirement with a ratio of 1.3 to 1.
On May 31, 2007, as required under the Term Loan, the Company entered into a five year fixed rate interest rate swap
agreement with a notional amount of $50 million to convert a portion of the outstanding Term Loan from variable to fixed
30
rates. Under this agreement, the Company paid to the counterparty a fixed rate of 5.23% and received from the
counterparty a variable rate based on three month LIBOR. This effectively converted $50 million of the Term Loan to a fixed
rate of 7.73% when including the applicable margin of the Term Loan of 2.50%. The variable rates on the interest rate swap
and $50 million of the Term Loan were reset every three months on the same LIBOR base rate and same date, at which time
the interest was settled and recognized as adjustments to interest expense. As of November 30, 2009, the unrealized loss of
the swap of $4.6 million was recognized as a non-current liability with a corresponding amount recognized in Accumulated
Other Comprehensive Income (loss). In November 2010, the Company terminated and settled the interest rate swap with the
counterparty at a cost of $4.3 million. As required under applicable accounting guidance, this amount is recognized in
Accumulated Other Comprehensive Income (loss) and will be amortized into interest expense over the remaining original
term of the interest rate swap agreement.
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. In January 2008, the
Facility was increased to $90 million. 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 including a reserve,
as calculated by the Lenders, for the Company’s interest rate swap (“interest rate swap reserve”). 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. Outstanding letters of credit on November 30, 2010 were $2.8 million. 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 during any fiscal
quarter, the Company must then maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement.
Average excess availability is defined as the average daily amount available for borrowing under the Facility during the
Company’s fiscal quarter. The Company was in compliance with this requirement as the average excess availability did not
fall below $20 million during 2010 and averaged $58 million during the fourth quarter of 2010.
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, 2010. The Eurodollar rate is a periodic fixed rate equal to LIBOR. The applicable margin for the Eurodollar
rate will vary from 1.25% to 2.00% depending on the Company’s fixed charge coverage ratio and the margin was 1.25% at
November 30, 2010.
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, 2010.
At November 30, 2010, the Company had $68.0 million of eligible inventory and receivables to support the eligible
borrowing base which is capped at $90.0 million under the Facility. At November 30, 2010, outstanding letters of credit
under the Facility were $2.8 million, there were no amounts borrowed under the Facility and the amount available for
borrowing under the Facility was $65.2 million.
The fair value of the Company’s long-term debt at November 30, 2010 approximated $370.7 million, which is lower than
the carrying value as a result of prevailing market rates on the Company’s debt.
The effective interest rate on the Company’s U.S. debt was 4.9% and 4.5% for 2010 and 2009, respectively.
Cash paid for interest was $6.8 million, $6.9 million and $12.2 million for 2010, 2009 and 2008, respectively.
In connection with the acquisition of Eliokem International SAS (“Eliokem”) as described below and in Note R, on
November 3, 2010, the Company issued a private placement of $250 million aggregate principal amount of Senior Notes
with a 7.875% interest rate, payable semi-annually. The Senior Notes mature on November 1, 2018 and are unsecured. As of
31
November 30, 2010, the proceeds of the Senior Notes were held in escrow subject to the completion of the Eliokem
acquisition. If this acquisition had not occurred, the Company would have been required to redeem the Senior Notes at a
premium. The Company may redeem a portion of the outstanding Senior Notes any time after October 2014 at a premium
above par, subject to certain restrictions. The Senior Notes are jointly, severally and unconditionally guaranteed on a senior,
unsecured basis by all of OMNOVA Solutions Inc.’s existing and future domestic subsidiaries that from time to time
guarantee obligations under the Company’s Senior Notes, with certain exceptions (the “Guarantors”). In connection with the
issuance of the Senior Notes, the Company entered into a Registration Rights Agreement among the Company, the
Guarantors and the initial purchasers of the Senior Notes. Under the Registration Rights Agreement, the Company and the
Guarantors agreed, among other things, to use reasonable best efforts to file an exchange offer registration statement with
the SEC with respect to the Senior Notes and the guarantees thereof within 150 days after the consummation of the
Acquisition.
Subsequent Event—Debt Transactions
Additionally, on December 9, 2010, the Company refinanced its existing $150 million Term Loan that had a balance of
$140.9 million as of November 30, 2010 with a new $200 million Term Loan (“New Term Loan”). The New Term Loan is
secured by the property, plant and equipment and intangible assets of the combined companies. The New Term Loan
carries a variable interest rate based on, at the Company’s option, either a Eurodollar rate or a base rate, in each case plus
an applicable margin. The Eurodollar rate is a periodic fixed rate equal to the London Inter Bank Offered Rate (“LIBOR”),
provided that the Eurodollar rate shall not be less than 1.75%. The applicable margin for the Eurodollar rate is initially 4.0%.
However, if the Company’s net leverage ratio falls below 2.75, the applicable margin will decrease to 3.75%. The base
interest rate is a fluctuating rate equal to the higher of (i) the Prime Rate, (ii) the sum of the Federal Funds Effective Rate plus
0.50% or (iii) the one month Eurodollar rate plus 1.0%. The applicable margin for the base rate is 3.0%. However, if the
Company’s net leverage ratio falls below 2.75, the applicable margin will decrease to 2.75%. Annual principal payments
consist of $2.0 million, due in quarterly installments, and annual excess free cash flow payments as defined in the New Term
Loan agreement, with any remaining balance to be paid May 31, 2017. 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 New Term Loan is secured by all real property and equipment of the
Company’s domestic facilities and guaranteed by the domestic subsidiaries of the Company. Additionally, the New Term
Loan provides for additional borrowings of the greater of $75 million or an amount based on a senior secured leverage ratio,
as defined in the New Term Loan, provided that certain requirements are met including an interest coverage ratio of 2.0.
The New 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 New Term Loan requires the Company to
maintain an initial senior secured net leverage ratio of less than 3.25 to 1, which decreases annually by 25 basis points
through December 1, 2014, and then remains at 2.5 to 1 thereafter.
The Company issued the New Term Loan at a discount of $2.0 million receiving cash of $198 million. This discount will
be reflected as a reduction of outstanding debt and amortized over the respective term of the debt.
Also in connection with the acquisition of Eliokem, in December 2010, the Company amended and restated the Asset Based
Facility (“Amended Facility”), increasing potential availability to $100 million, which can be further increased up to $150 million,
subject to additional borrowing base assets and lender approval. Total availability is dependent on domestic accounts receivable
and inventory. The Amended Facility increases the average excess availability requirement to $25 million during any fiscal quarter
but retains the fixed charge coverage ratio of 1.1 to 1 if average excess availability falls below the $25 million. Applicable margins
are based on the Company’s average daily excess availability during the previous fiscal quarter. If average excess availability is
greater than $50 million, the applicable margin will be 2.25% on Eurodollar loans, 1.25% on base rate borrowings and .625% on
commitments for unused credit lines. If average excess availability is greater than $25 million but less than $50 million, the
applicable margin will be 2.5% on Eurodollar loans, 1.5% on base rate borrowings and 0.5% on commitments for unused credit
lines. If average excess availability is less than $25 million, the applicable margin will be 2.75% on Eurodollar loans, 1.75% on base
rate borrowings and 0.375% on commitments for unused credit lines.
Net proceeds from the notes and the New Term Loan were used for the acquisition of Eliokem (including the
repayment of Eliokem’s debt), the repayment of amounts outstanding under our existing term loan, related fees and
expenses and for general working capital purposes. The acquisition was completed on December 9, 2010. The Amended
Facility was not used to fund the acquisition.
32
The Company expects to incur approximately $15.7 million of deferred financing costs in connection with the issuance
of the Senior Notes and the new $200 million Term Loan. These new deferred financing costs will be amortized over the
respective terms of the underlying debt. Related amortization expense in 2011 is expected to be $2.2 million. The
Company’s prior deferred financing fees of $1.1 million as of November 30, 2010 related to the existing $150.0 million Term
Loan B will be written off in the first quarter of 2011.
Contractual Obligations
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt and amounts due banks(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments on long-term debt(2)
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension funding obligations(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments Due By Period
Less
Than 1
Year
2 — 3
Years
4 — 5
Years
(Dollars in millions)
$ 5.3
31.2
4.4
4.0
2.8
.4
$
4.0
60.9
6.4
—
23.0
6.9
$ 4.0
60.5
3.1
—
25.3
2.8
Total
$453.3
232.4
19.3
4.0
78.9
23.8
More
Than 5
Years
$440.0
79.8
5.4
—
27.8
13.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$811.7
$48.1
$101.2
$95.7
$566.7
(1) Comprised of the Company’s outstanding debt at December 9, 2010 including $250.0 million Senior Notes, $200.0 Term Loan
and foreign debt of $3.3 million. See Debt.
(2) Based on outstanding debt balances as of December 9, 2010 and estimated interest rates. As those are based on estimates,
actual future payments may differ substantially.
(3) Payments are based on Company estimates and current funding laws. Actual results may differ substantially.
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, 2010, 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
litigation,
estimates and judgments including those related to product
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.
returns, accounts receivable,
inventories,
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 the customer, 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.
33
B) Allowance For Doubtful Accounts
The Company’s policy is to identify all customers that are considered doubtful of collection based upon the customer’s
financial condition, payment history, credit rating and other relevant factors 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 $2.0 and $2.3 million at November 30, 2010 and 2009, 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 $7.2 million at both November 30, 2010 and 2009.
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. 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 by recognizing in its 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 Loss. Effective
November 30, 2009, the Company adopted measurement date provisions which require that plan assets and obligation be
measured as of the balance sheet date. Prior to 2009, the Company measured plan assets and obligations at August 31.
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 and amortized over the estimated remaining service life of employees remaining in the
plan. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension
(expense) income.
The Company recorded pension expense of $8.2 million in 2010 and $2.8 million in 2009. Included in 2010 is a non-cash
curtailment expense of $4.2 million. Pension expense is calculated using the discount rate, as determined below, to discount
plan liabilities at the prior year measurement date. The rates of 6.05% and 7.27% were used to calculate the pension
expense in 2010 and 2009, respectively. The Company anticipates 2011 non-cash expense to be approximately $2.6 million
using a discount rate of 5.83%. An increase or decrease of 25 basis points in the discount rate would decrease or increase
expense on an annual basis by approximately $0.1 million. Cash contributions to the pension plan were $5.1 million in 2010
and no contributions were made in 2009.
The Company determined the discount rate used to discount the plan liabilities at the plan’s measurement date, which
was November 30, 2010. The discount rate reflects the current rate at which the pension liabilities could be effectively
34
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. The Company determined the discount rate used to measure the defined
benefit pension plan obligations as of November 30, 2010 should be 5.83% compared to 6.05% in 2009.
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
resulted in the selection of a long-term rate of return on assets assumption of 8.0% for plan years 2010 and 2009. The
measurement dates of November 30, 2010 and 2009 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. Pension plan assets are measured at fair value on the
measurement date.
Based on current estimates of pension asset performance, interest rate discount rate assumptions and credit balance,
the Company anticipates it will be required under the Pension Protection Act of 2006 (“PPA-2006”), to make a cash
contribution to its pension plan of approximately $2.8 million in 2011. The Company, under rules of the PPA-2006, has
elected the fifteen year amortization schedule for the period beginning with the 2009 plan year.
Factors that could alter future cash requirements and timing of any such cash equivalents are:
(cid:129) Investment returns which differ materially from the Company’s 8.0% return assumption.
(cid:129) Significant changes in interest rates, affecting the discount rate.
(cid:129) Opportunities to reduce future cash requirements by accelerating contributions ahead of the minimum required
schedule. Voluntary contributions in excess of minimally required amounts may prevent the need for larger
contributions in the future.
F)
Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using the enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company
records a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more likely than
not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
As of November 30, 2010, the Company had approximately $93 million of net federal, state and local deferred tax assets
primarily related to federal domestic loss carryforwards, goodwill and indefinite lived intangible asset impairment losses,
changes in pension liabilities, and other temporary differences for which a domestic valuation allowance of $1.2 million has
been provided. In addition, as of November 30, 2010 the Company had $1.3 million of net deferred tax liabilities related to
the Decorative Products Asian businesses.
The Company, after considering the guidance in ASC 740, “Income Taxes,” reversed a significant portion of its
valuation reserve for the U.S. deferred tax asset. This resulted in a tax benefit of $98.2 million. For the year ended
November 30, 2010, the Company again considered the positive and negative evidence as required by ASC 740 and
concluded that it is more likely than not that the Company will realize the benefit from the U.S. deferred tax assets due to a
preponderance of positive evidence, which includes a three year U.S. cumulative income position, increased predictability
over future taxable income and future taxable income from the reversal of deferred tax assets and liabilities in future years.
This may result in the Company recognizing higher income tax expense going forward. However, because of NOLC’s, the
Company does not expect to incur significant cash payments for U.S. taxes over the next several years.
The Company has not provided U.S. income taxes on certain of its non-U.S. subsidiaries undistributed earnings as such
amounts are permanently reinvested outside the U.S. To the extent that foreign earnings previously treated as permanently
35
reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
However, based on the Company’s policy of permanent reinvestment, it is not practicable to determine the U.S. federal
income tax liability, if any, which would be payable if such earnings were not permanently reinvested. As of November 30,
2010, the non-U.S. subsidiaries have a cumulative unremitted foreign loss position of $21.8 million for which U.S. income
taxes have not been provided.
The Company utilizes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is more likely than not of being realized upon ultimate settlement.
The Company’s accounting policy for interest and/or penalties related to underpayments of income taxes is to include
interest and penalties in tax expenses. Accrued interest and penalties were $0.3 million as of November 30, 2010.
G) Share-Based Employee Compensation
The Company uses the fair value method of recording share-based payments, based on the grant date fair value.
While the Company regularly evaluates the use of share-based payments, its practice has been to issue fewer stock
options than have 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 N to the Company’s Consolidated Financial Statements for a further
discussion of share-based payments.
H) Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and definite-lived intangibles are reviewed for impairment
whenever events or 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.
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, 2010 reflects reserves for environmental
remediation efforts of $0.4 million.
Capital expenditures for projects related to environmental matters were $0.3 million in 2010, $0.2 million in 2009 and
$1.1 million in 2008. During 2010, non-capital expenditures for environmental compliance and protection totaled
$5.7 million, all of which were for recurring costs associated with managing hazardous substances and pollution abatement
in ongoing operations. Similar non-capital expenditures were $4.8 million and $5.0 million in years 2009 and 2008,
respectively. The Company anticipates that non-capital environmental expenditures for the next several years will be
consistent with historical expenditure levels.
Employee Matters
At November 30, 2010, the Company employed approximately 2,430 employees at offices, plants and other facilities
located principally throughout the United States, United Kingdom, China and Thailand. Approximately 14% or 350 of the
Company’s employees are covered by collective bargaining agreements in the United States. In March 2010, the Company
and its Calhoun, Georgia employees represented by Local 1876, Southern Region of Workers United, SEIU, agreed to a new
three year contract. On May 20, 2010, approximately 180 Columbus, Mississippi employees represented by United
36
Steelworkers Local #748-L voted against ratification of a new contract proposal and subsequently went on strike on
May 21, 2010.
Initially, the Company’s salaried workforce and contract labor operated the plant, meeting customers’
requirements. During the fourth quarter of 2010, the Company began transitioning from contract labor to locally hired
replacement employees. The Company incurred strike-related costs of $5.5 million in 2010, of which $3.3 million was
included in cost of goods sold and $2.2 million included in other expense (income). Strike-related costs peaked in July 2010
and have declined significantly since then. In the fourth quarter of 2010, strike-related costs were $1.2 million, compared to
$3.9 million in the third quarter of 2010. The Company generally would describe its relationship with employees as good
even though its union-represented Columbus, Mississippi employees chose to go on strike.
New Accounting Pronouncements
Effective December 1, 2009, the Company adopted authoritative guidance issued by the financial Accounting Standards
Board (“FASB”) on business combinations. This guidance modifies the accounting for business combinations by requiring
that assets acquired, liabilities assumed and contingent consideration arrangements be recorded at fair value on the date of
acquisition. Pre-acquisition contingencies will generally be accounted for at fair value using purchase accounting. The
guidance also requires that transaction costs be expensed as incurred, acquired research and development costs be
capitalized as indefinite-lived intangible assets, and that requirements for exit and disposal activities be met at the
acquisition date in order to be recognized as part of a restructuring plan in purchase accounting. The adoption of this
guidance resulted in the Company recognizing acquisition related expenses in 2010, which under prior guidance would have
been recognized as part of the purchase price.
Effective December 1, 2009, the Company adopted authoritative guidance issued by FASB that changes the accounting
and reporting for noncontrolling interest. This guidance requires noncontrolling interest to be classified as equity in the
balance sheet. The income and comprehensive income attributable to noncontrolling interests, if any, is to be included in
income and comprehensive income of the consolidating entity. The adoption of this guidance did not have a material
impact on the financial statements of the Company.
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2010-06, “Fair Value Measurements and Disclosures,” which amends the disclosure requirements related to recurring and
nonrecurring fair value measurements. This guidance requires disclosure of transfers of assets and liabilities between Level 1
and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured
under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods
beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim
periods beginning after December 15, 2010. As of November 30, 2010, there have been no transfers between Levels 1 and 2.
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 K 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 were $140.9 million and there were no borrowings under the
Facility as of November 30, 2010. The weighted average effective interest rate of the Company’s outstanding variable rate
debt was 4.5% as of November 30, 2010. A hypothetical increase or decrease of 100 basis points on the Company’s variable
rate debt would impact the Company’s interest expense by approximately $1.4 million.
37
The Company is subject to foreign currency exchange risk primarily due to the European wallcovering business and the
Asian businesses. The Company enters into foreign currency forward exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. For further discussion of risk
associated with foreign currencies, refer to Note P of the Consolidated Financial Statements.
The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
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, 2010.
The effectiveness of the Company’s internal control over financial reporting as of November 30, 2010 has been audited
by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of OMNOVA Solutions Inc.:
We have audited OMNOVA Solutions Inc.’s internal control over financial reporting as of November 30, 2010, 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
reporting was maintained in all material respects. Our audit included obtaining an
internal control over financial
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
in reasonable detail, accurately and fairly reflect the
procedures that (1) pertain to the maintenance of records that,
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, 2010, 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 of OMNOVA Solutions Inc. as of November 30, 2010 and 2009 and the related consolidated
statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended November 30,
2010 and our report dated January 24, 2011 expressed an unqualified opinion thereon.
Akron, Ohio
January 24, 2011
39
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, 2010, 2009 and 2008 . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at November 30, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2010, 2009 and 2008 . . . . . . . .
Consolidated Statements of Cash Flows for the years ended November 30, 2010, 2009 and 2008 . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
42
43
44
45
46
47
Page
Number
40
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 24, 2011
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of OMNOVA Solutions Inc.:
We have audited the accompanying consolidated balance sheets of OMNOVA Solutions Inc. as of November 30, 2010 and
2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years
in the period ended November 30, 2010. 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, 2010 and 2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended November 30, 2010, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for
business combinations effective December 1, 2009; as discussed in Note A, for the year ended November 30, 2009, the
Company eliminated the lag in reporting the results of certain of its consolidated subsidiaries; and as discussed in Note L, as
of November 30, 2009, the Company changed its measurement date 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, 2010, 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 24, 2011 expressed an unqualified opinion thereon.
Akron, Ohio
January 24, 2011
42
OMNOVA SOLUTIONS INC.
Consolidated Statements of Operations
Years Ended November 30,
2010
2009
2008
(Dollars in millions, except per share data)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$846.2
684.8
$696.4
536.7
$869.4
731.4
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net
Income (loss) from continuing operations before income taxes . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161.4
99.6
20.6
6.2
.6
8.7
—
5.5
1.7
142.9
18.5
(89.4)
159.7
99.9
22.9
1.1
2.1
8.1
—
—
(2.3)
131.8
27.9
1.7
138.0
104.8
23.9
—
.6
13.0
(.2)
—
(2.1)
140.0
(2.0)
.2
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107.9
$ 26.2
$ (2.2)
Income (Loss) Per Share:
Net income (loss) per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.42
Net income (loss) per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.40
$
$
.59
.59
$ (.05)
$ (.05)
See notes to consolidated financial statements.
43
OMNOVA SOLUTIONS INC.
Consolidated Balance Sheets
ASSETS:
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
2009
(Dollars in millions, except
per share amounts)
$ 75.6
253.1
106.8
45.8
3.5
6.0
490.8
131.5
5.8
86.2
10.5
1.2
$ 41.5
—
105.9
37.5
2.4
—
187.3
141.9
4.4
1.2
1.9
1.3
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 726.0
$ 338.0
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Amounts due banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and personal property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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; 45.2 million and 44.5 million shares
issued as of November 30, 2010 and 2009, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional contributed capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost; 0.2 million shares and 0.1 million shares at November 30, 2010 and 2009,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4.8
88.6
17.3
2.4
—
9.8
122.9
250.0
139.4
7.6
73.3
1.7
7.7
602.6
$
3.3
64.4
16.4
2.6
.9
4.0
91.6
—
140.8
8.4
65.4
.9
15.8
322.9
—
—
4.5
318.0
(112.0)
(1.3)
(85.8)
4.4
314.1
(219.9)
(.4)
(83.1)
15.1
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123.4
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 726.0
$ 338.0
See notes to consolidated financial statements.
44
OMNOVA SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity
for the Years Ended November 30, 2010, 2009 and 2008
Common
Stock
Additional
Contributed
Capital
Retained
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
(Deficit)
Total
Comprehensive
Income (Loss)
$4.3
$312.7
$(243.3)
(2.2)
$(4.5)
$ (3.9)
(13.0)
$ 65.3
(2.2)
(13.0)
$ (2.2)
(13.0)
(1.2)
(1.2)
(1.2)
(Dollars in millions)
2008
Balance November 30, 2007 . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . .
Unrecognized loss on interest rate
swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension plans:
Prior service credits . . . . . . . . . . . . . . . .
Net actuarial loss . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . . . . . . . .
.4
(15.9)
.4
(15.9)
(.9)
4.1
Exercise of stock options and other . . . . . .
Common stock issuance . . . . . . . . . . . . . . .
.1
(.9)
.1
3.9
Balance November 30, 2008 . . . . . . . . . .
$4.4
$311.8
$(245.4)
$ (.6)
$(33.6)
$ 36.6
2009
Effects of accounting change regarding
pension plan measurement date
change September 1 – November 30,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . .
Unrecognized loss on interest rate
swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension plans:
Prior service costs . . . . . . . . . . . . . . . . .
Net actuarial loss . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . . . . . . . .
(.6)
26.2
Common stock issuance . . . . . . . . . . . . . . .
2.3
(.1)
.2
(.2)
3.4
(.9)
(.4)
(51.4)
(.8)
26.2
3.4
(.9)
(.4)
(51.4)
2.4
Balance November 30, 2009 . . . . . . . . . .
$4.4
$314.1
$(219.9)
$ (.4)
$(83.1)
$ 15.1
107.9
2010
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . .
Unrecognized gain on interest rate swap
(net of tax of $0.3 million) . . . . . . . . . . . . .
Defined benefit pension plans:
Prior service credits (net of tax of $0.6
. . . . . . . . . . . . . . . . . . . . . . . .
million)
Net actuarial loss (net of tax of $(3.4)
million)
. . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . .
Common stock issuance . . . . . . . . . . . . . . .
.1
3.9
(.9)
1.4
.4
1.0
(5.5)
107.9
1.4
.4
1.0
(5.5)
3.1
Balance November 30, 2010 . . . . . . . . . .
$4.5
$318.0
$(112.0)
$(1.3)
$(85.8)
$123.4
See notes to consolidated financial statements.
45
.4
(15.9)
$ (31.9)
$
(.2)
26.2
3.4
(.9)
(.4)
(51.4)
$ (23.3)
$107.9
1.4
.4
1.0
(5.5)
$105.2
Years Ended November 30,
2010
2009
2008
(Dollars in millions)
$ 107.9
$ 26.2
$
(2.2)
—
(.2)
20.6
(9.7)
6.2
9.2
3.5
(.3)
(.2)
(92.3)
1.0
(.6)
(7.6)
(1.2)
6.7
.4
(5.1)
4.3
2.4
—
1.0
22.9
—
—
—
2.3
.7
.8
(.2)
—
12.0
8.5
2.2
(.7)
.1
—
—
(1.6)
74.2
(10.4)
—
—
—
.8
.6
—
(.2)
.1
23.9
—
—
—
2.4
1.0
.4
(.4)
.2
(1.7)
(3.8)
1.7
(11.5)
.6
—
—
7.1
17.6
(14.8)
(25.2)
—
—
—
—
—
OMNOVA SOLUTIONS INC.
Consolidated Statements of Cash Flows
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from dissolution of joint marketing alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on currency collar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for obsolete inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution to defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided By Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.0
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of business, less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from dissolution of joint marketing alliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14.8)
—
(2.5)
9.7
.4
.5
(253.1)
Net Cash Used By Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(259.8)
(9.0)
(40.0)
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt proceeds (payments), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided (Used) By Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
662.1
(413.6)
1.5
—
250.0
(1.1)
34.1
41.5
514.2
(555.5)
(2.9)
—
(44.2)
3.1
24.1
17.4
728.6
(691.1)
(2.8)
.3
35.0
(7.8)
4.8
12.6
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 75.6
$ 41.5
$ 17.4
See notes to consolidated financial statements.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A—Significant Accounting Policies
Basis of Consolidation—The consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries.
Effective December 31, 2007, the Company purchased the minority interests in its joint venture businesses. The 2008
consolidated results of operations include the results of operations for these subsidiaries on the equity method for two
months (November and December 2007 prior to the purchase transaction) and full consolidation for ten months (January
through October 2008).
Prior to August 1, 2009, the Company’s Decorative Products Asian subsidiaries’ results of operations were included in
the Company’s consolidated financial statements on a one-month delay in order to facilitate timely reporting and
consolidation. As a result of process improvements during the third quarter of 2009, this one-month delay was eliminated as
it was no longer required in order to achieve timely consolidation. The Company believes that this change is preferable as it
includes the results of the Asian businesses on a current basis. While a change to eliminate the previously existing reporting
lag is considered a change in accounting principle, the Company did not retrospectively apply this change in accounting
principle to prior periods since its impact to the consolidated balance sheets and related statements of operations and cash
flows was immaterial for all periods. As a result of this change, the Company recognized additional net sales and net income
of $8.0 million and $0.2 million, respectively, in the third quarter of 2009.
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 the customer, 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 charges to cost of products sold costs associated with managing hazardous
substances and pollution in ongoing operations as incurred. 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 $8.8 million in 2010, $8.2 million
in 2009 and $10.3 million in 2008, are charged to expense as incurred.
Advertising Costs—Advertising costs are expensed when incurred. Advertising expense was $1.0 million, $1.2 million
and $2.1 million in 2010, 2009 and 2008, respectively.
Cash and Cash Equivalents—The Company considers all highly liquid instruments with maturities of 90 days or less as
cash equivalents.
Restricted Cash—Cash which is restricted as to withdrawal or usage,
is recognized as restricted cash. At
November 30, 2010, restricted cash consisted of proceeds from the issuance of $250 million Senior Notes, along with
interest and certain debt issuance fees. These amounts were held in an escrow account, as required by the terms of the
Senior Notes, until December 9, 2010 at which time the restricted cash, along with existing cash and a refinancing of the
Company’s $150 million Term Loan B was used to complete the acquisition of Eliokem International SAS (“Eliokem”), as
discussed in Note R.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note A—Significant Accounting Policies (Continued)
Financial Instruments and Fair Value Measurements—Financial assets and financial liabilities carried on the balance
sheet include cash and deposits at financial institutions, trade receivables and payables, other receivables and payables,
borrowings and derivative instruments. The accounting policies on recognition and measurement of these items are
disclosed elsewhere in these financial statements. The Company is mainly exposed to credit, interest rate and currency
exchange rate risks which arise in the normal course of business.
The Company measures financial assets and liabilities at fair value in three levels of inputs as follows:
(cid:129) Level 1—Quoted prices in active markets for identical assets or liabilities.
(cid:129) Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in an active market, quoted prices in markets that are not active, and model-derived valuations in which all
significant inputs are observable or can be corroborated by observable market data.
(cid:129) Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
Derivative Instruments—The Company recognizes derivative instruments as either an asset or a liability at fair value.
For a cash flow hedge, the fair value of the effective portion of the derivative is recognized as an asset or liability with a
corresponding amount
in Accumulated Other
in Accumulated Other Comprehensive Income (loss). Amounts
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 of the derivative and
the present value of the cumulative change in the expected future cash flows of the related instrument. Any ineffective
portion of a cash flow hedge is recognized in earnings immediately. For derivative instruments not designated as hedges,
the change in fair value of the derivative is recognized in earnings each reporting period.
The Company does not enter into derivative instruments for trading or speculative purposes.
Accounts Receivable Allowance—The Company’s policy is to identify all customers that are considered doubtful of
collection based upon the customer’s financial condition, payment history, credit rating and other relevant factors and to
reserve the portion of such accounts receivable for which collection does not appear likely. Accounts are written-off when all
collection efforts are exhausted. 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 on a consistent basis. All U.S. based inventory, which
is 59.5% of the total, 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 impact the carrying value of the Company’s inventory
and require the Company to increase its reserve for obsolescence. The reserve for inventory obsolescence, which applies
primarily to our Decorative Products segment, was $7.2 million at both November 30, 2010 and November 30, 2009.
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note A—Significant Accounting Policies (Continued)
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 using depreciable lives as follows:
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years
25 – 40
5 – 15
3 – 10
3 – 5
Leasehold improvements are depreciated over the shorter of the lease term, including any expected renewal periods,
or the estimated useful life of the improvement.
Intangible assets, such as customer lists, 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
finite-lived intangible assets at
November 30, 2010 and 2009 was $18.2 million and $17.1 million, respectively.
lives with periods ranging from 3 to 30 years. Accumulated amortization of
Impairment of 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 realizable 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.
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—The Company follows the liability method of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The
Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-
likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the enactment date.
The Company has not provided U.S. income taxes on certain of its non-U.S. subsidiaries undistributed earnings as such
amounts are permanently reinvested outside the U.S. To the extent that foreign earnings previously treated as permanently
reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
However, based on the Company’s policy of permanent reinvestment, it is not practicable to determine the U.S. federal
income tax liability,
if any, which would be payable if such earnings were not permanently reinvested. As of
November 30, 2010, the non-U.S. subsidiaries have a cumulative unremitted foreign loss position of $21.8 million for which
U.S. income taxes have not been provided.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note A—Significant Accounting Policies (Continued)
The Company utilizes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is more likely than not of being realized upon ultimate settlement.
The Company’s accounting policy for interest and/or penalties related to underpayments of income taxes is to include
interest and penalties in tax expenses.
Accounting For Leases—Lease expense is recorded on a straight-line basis over the non-cancelable lease term,
including any optional renewal terms that are reasonably expected to be exercised. Leasehold improvements related to
these operating leases are amortized over the estimated useful life, or the non-cancelable lease term, whichever is shorter.
Share-Based Compensation—Share-based compensation is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the requisite service period (generally the vesting period).
Subsequent Events—The Company has evaluated all subsequent events from the date on the balance sheet through
the date these financial statements are being filed with the Securities and Exchange Commission. Except for the acquisition
of Eliokem and certain debt refinancing on December 9, 2010, as disclosed in Note R, there were no other material events or
transactions occurring during this subsequent event period which requires recognition or disclosure in the financial
statements.
New Accounting Pronouncements—Effective December 1, 2009, the Company adopted authoritative guidance issued
by the Financial Accounting Standards Board (“FASB”) on business combinations. This guidance modifies the accounting for
business combinations by requiring that assets acquired, liabilities assumed and contingent consideration arrangements be
recorded at fair value on the date of acquisition. Pre-acquisition contingencies will generally be accounted for at fair value
using purchase accounting. The guidance also requires that transaction costs be expensed as incurred, acquired research
and development costs be capitalized as indefinite-lived intangible assets, and that requirements for exit and disposal
activities be met at the acquisition date in order to be recognized as part of a restructuring plan in purchase accounting. The
adoption of this guidance resulted in the Company recognizing acquisition related expenses in 2010 which under prior
guidance would have been recognized as part of the purchase price.
Effective December 1, 2009, the Company adopted authoritative guidance issued by FASB that changes the accounting
and reporting for noncontrolling interest. This guidance requires noncontrolling interest to be classified as equity in the
balance sheet. The income and comprehensive income attributable to noncontrolling interests, if any, is to be included in
income and comprehensive income of the consolidating entity. The adoption of this guidance did not have a material
impact on the financial statements of the Company.
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2010-06, “Fair Value Measurements and Disclosures,” which amends the disclosure requirements related to recurring and
nonrecurring fair value measurements. This guidance requires disclosure of transfers of assets and liabilities between Level 1
and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on
purchases, sales, issuances, and settlements on a gross basis in the reconciliation of the assets and liabilities measured
under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods
beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim
periods beginning after December 15, 2010. As of November 30, 2010, there have been no transfers between Levels 1 and 2.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note B—Restructuring and Severance
The following table is a summary of restructuring and severance charges for 2010, 2009 and 2008:
(Dollars in millions)
$.5
Severance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.1
$ .6
— .1
Other exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
2010
2009
2008
$ .6
$2.1
$.6
During 2010, the Company recognized restructuring and severance costs of $0.4 million in Performance Chemicals and
$0.2 million in Decorative Products, related to workforce reductions.
During 2009, the Company recognized restructuring and severance costs of $1.8 million in Decorative Products,
$0.2 million in Performance Chemicals and $0.1 million at Corporate, related to workforce reduction actions. Employee
headcount was reduced by 49 employees related to these actions.
In November 2008, the Company announced the closure of its Dupo, Illinois extrusion facility. As a result, the Company
recorded $0.1 million of facility closure costs. During January 2009, the assets of this facility were sold with no related gain or loss.
Also in 2008, the Company recorded $0.5 million of severance charges related to workforce reductions, of which $0.4
million was recorded by Decorative Products and $0.1 million was recorded by Performance Chemicals. The Company
terminated approximately 17 employees in connection with these workforce reductions.
The following table summarizes the Company’s liabilities related to restructuring and severance activities:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November
2009
2010
Provision
Payments
November
2010
$—
—
—
$—
(Dollars in millions)
$ .3
$ .4
.2
.2
—
—
$ .6
$ .5
$.1
—
—
$.1
Note C—Other Expense (Income)
The following table sets forth the major components of other expense (income):
Years Ended November 30,
2010
2009
2008
Gain on RohmNova dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment to Euro Currency Collar (see Note P) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strike-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign import/export duty claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flood related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification reserve reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
$ —
—
—
(.5)
(.3)
(.4)
.6
(.2)
(.3)
(1.2)
$(9.7)
9.2
2.2
.8
.3
(.1)
—
(.1)
(.7)
(.2)
$ —
—
—
(.6)
—
(.4)
—
(.3)
—
(.8)
$ 1.7
$(2.3)
$(2.1)
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note C—Other Expense (Income) (Continued)
During May 2010, the Company’s Performance Chemicals segment received cash and assets totaling $9.7 million
related to the termination of the RohmNova joint marketing alliance. RohmNova was a sales, marketing and technical service
alliance between the Company and the Rohm and Haas Company that served the coated paper and paperboard market
since 2002. The termination was required by The Dow Chemical Company’s acquisition of Rohm and Haas Company.
In connection with the Company’s acquisition of Eliokem International SAS, which was consummated on December 9,
2010, the Company entered into a zero cost forward Currency Collar in October 2010 to hedge changes in exchange rate
movements of the Euro to the U.S. dollar. Due to changes in the exchange rate for the Euro, the fair value of the Currency
Collar as of November 30, 2010 was a liability of $9.2 million. The Company recognized the fair value of this Currency Collar
as a current liability with an offsetting expense in other expense (income). The Company settled this Currency Collar with the
counter-party on December 1, 2010.
On May 20, 2010, the approximately 180 Columbus, Mississippi employees represented by United Steelworkers Local
#748-L voted against ratification of a new contract proposal and subsequently went on strike on May 21, 2010. The
Company’s salaried workforce and contract labor were operating the plant and meeting customers’ requirements through
the third quarter of 2010. During the fourth quarter of 2010, the Company transitioned to locally hired replacement
employees. The Company incurred strike-related costs of $5.5 million in 2010 of which $3.3 million is included in cost of
goods sold and $2.2 million is included in other expense (income). The Company does not anticipate incurring any
significant strike-related costs in 2011.
The indemnification reserve reversal relates to indemnifications the Company had with its former parent, GenCorp, Inc.
relating to certain tax matters prior to 1999. The Company has determined it is unlikely that these obligations will be
required due to the passage of time and other factors, and accordingly, the Company reversed these indemnifications.
Note D—Income Taxes
Income Tax (Benefit) Expense
Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. federal
State and local
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended November 30,
2010
2009
2008
(Dollars in millions)
$
.2
.7
(1.5)
(.6)
(82.0)
(7.5)
.7
(88.8)
$ .3
.2
1.7
2.2
—
—
(.5)
(.5)
$—
—
—
—
—
.2
—
.2
Income Tax (Benefit) Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(89.4)
$1.7
$ .2
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note D—Income Taxes (Continued)
Effective Income Tax Rate
Tax at Federal Statutory Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Recognized) Unrecognized net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Release of U.S. valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes at different rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Years Ended November 30,
2010
2009
2008
35.0%
(.4)
(530.3)
9.5
(3.0)
(7.0)
16.4
(3.4)
35.0%
(27.9)
—
—
.3
(2.7)
.7
1.0
(35.0)%
25.8
—
—
4.9
2.8
7.2
.7
Effective Income Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(483.2)%
6.4%
6.4%
Deferred Taxes
November 30,
2010
2009
Assets
Liabilities
Assets
Liabilities
(Dollars in millions)
Accrued estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOLC’s and other carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9.5
14.9
—
25.9
51.0
4.9
2.0
(6.3)
Deferred Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$101.9
$ —
—
11.5
—
—
—
—
—
$11.5
$15.1
20.3
—
24.8
52.0
3.4
—
(101.1)
$14.5
$ —
—
13.3
—
—
—
1.8
—
$15.1
As of November 30, 2010, the Company had approximately $118.9 million of domestic federal net operating losses
carryforwards (NOLC’s) and $109.2 million of state and local NOLC’s and $0.7 million of foreign tax credit carryforwards and
$0.5 million of AMT credit carryforwards. The majority of the federal, state and local NOLC’s expire in the years 2021 through
2031 while the foreign tax credit carryforwards expire between 2010 and 2017. The U.S. domestic pretax income was
$15.3 million, $20.3 million, and $0.2 million in 2010, 2009 and 2008, respectively. As of November 30, 2010, the Company
had approximately $19.3 million of foreign NOLC’s of which $16.4 million with an indefinite carryforward period. Pretax
income (loss) of foreign subsidiaries was $3.5 million, $7.6 million, and $(2.2) million in 2010, 2009 and 2008, respectively.
Cash paid for income taxes in 2010 and 2009 was $1.6 million and $1.0 million, respectively, and related primarily to federal
AMT, state and foreign income taxes.
The valuation allowance decreased by $94.8 million, for the year ended November 30, 2010, and increased by
$13.0 million and $2.8 million for the years ended November 30, 2009 and 2008, respectively. The decrease of $94.8 million
in 2010 includes an increase of $3.5 million of adjustments to the opening balance sheet valuation allowance due to changes
in circumstances that caused a change in judgment about the realizability of the related deferred tax asset in future years.
The net increase in the valuation allowance was $13.0 million in 2009, primarily due to increases in deferred tax assets
relating to changes in the pension liability. The valuation had a net increase of $2.8 million in 2008. At November 30, 2009,
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note D—Income Taxes (Continued)
the Company, considered the guidance in ASC 740, Income Taxes, and decided to maintain its valuation allowance until it
established further consistency in producing taxable income. Despite generating income in 2009, several factors including
market demand and volatile raw material costs had in recent years resulted in losses and difficulty in predicting future
taxable income. For the year ended November 30, 2010, the Company again considered the positive and negative evidence
as required by ASC 740 and concluded, that it is more likely than not that the Company will realize the benefit from the U.S.
deferred tax assets due to a preponderance of positive evidence, which includes a three year U.S. cumulative income
position, increased predictability over future taxable income, and future taxable income from the reversal of deferred tax
assets and liabilities in future years. During the fourth quarter of 2010, the Company released the related U.S. valuation
allowance resulting in a credit to income tax (benefit) expense. Of the total 2010 decrease of $98.3 million, $98.2 million
relates to a U.S. valuation allowance release against the U.S. federal, and certain state and local deferred tax assets which
include a federal valuation allowance release of $88 million and a state and local valuation allowance release of $10.2 million.
At November 30, 2010, the total unrecognized tax benefits were $3.8 million, excluding $0.3 million of penalties and
interest. Of the total, $1.3 million would, if recognized, impact the Company’s effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits excluding interest and penalties is as
follows:
November 30,
2010
2009
(Dollars in millions)
Opening balance December 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase based on tax positions related to current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease based on tax positions in the prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction due to lapse of statue of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.5
—
(1.1)
(2.7)
0.1
Ending balance November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.8
$7.1
1.1
(.5)
(.5)
.3
$7.5
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense. For
the year 2010, the Company recognized an income tax benefit related to interest and penalties due of $0.7 million. The
Company recognized in income tax expense interest and penalties due to tax authorities of $0.1 million and $0.1 million in
years 2009 and 2008, respectively.
During the next twelve months, the Company expects its unrecognized tax benefit, including penalties and interest, to
decrease by $0.6 million due to expiration of statutes. However, additional unrecognized tax benefits could arise that would
change such estimate.
With limited exceptions, the Company is no longer open to audit under the statutes of limitation by the Internal
Revenue Service and various states and foreign taxing jurisdictions for years prior to 2005.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note E—Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows:
Years Ended November 30,
2010
2009
2008
(Dollars in millions)
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized loss on interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ (1.4)
(4.6)
(77.1)
(4.2)
(81.6)
$ (4.8)
(3.7)
(25.1)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(85.8)
$(83.1)
$(33.6)
The amounts included in Accumulated Other Comprehensive Loss during 2010 and 2009 relating to the Company’s
employee benefit plans were as follows:
Pension
Domestic
Foreign
Health
Care
Total
(Dollars in millions)
2010
Net Actuarial (Loss) Gain
Net actuarial (loss) gain incurred during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization included in net periodic expense (income)
$(10.3)
4.1
Net change in net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (6.2)
Prior Service Cost
Amortization included in net periodic expense (income)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.6
1.3
Net change in prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.9
2009
Net Actuarial (Loss) Gain
Net actuarial (loss) gain incurred during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization included in net periodic expense (income)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(50.9)
1.6
.3
Net change in net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(49.0)
Prior Service Cost
Amortization included in net periodic expense (income)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(.1)
.1
Net change in prior service costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$(.1)
.1
$—
$—
—
$—
$(.1)
(.1)
—
$(.2)
$—
—
$—
$ (.4)
(2.3)
$(10.8)
1.9
$(2.7)
$ (8.9)
$ (.3)
—
$
.3
1.3
$ (.3)
$ 1.6
$ .5
(2.4)
(.6)
$(50.5)
(.9)
(.3)
$(2.5)
$(51.7)
$ (.3)
—
$
(.4)
.1
$ (.3)
$
(.3)
Note F—Earnings Per Share
Certain of the Company’s unvested restricted shares contain rights to receive nonforfeitable dividends and are
considered participating securities, requiring the two-class method of computing earnings per share. The prior period
earnings per share data has been adjusted to retrospectively reflect the application of the two-class method. There was no
impact on the computation of the Company’s net income per common share for 2008 and 2007, however, the impact on
2009 was a change from $0.61 per basic and diluted share to $0.59 per basic and diluted share.
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note F—Earnings Per Share (Continued)
The following table sets forth the computation of earnings per common share and fully diluted earnings per common
share:
Year Ended November 30,
2010
2009
2008
(Dollars in millions, except
per share data)
Basic Earnings (Loss) Per Share:
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income (loss) allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107.9
2.8
$26.2
.7
$ (2.2)
—
Net income (loss) allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$105.1
$25.5
$ (2.2)
Total weighted-average shares outstanding — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Weighted-average participating shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.6
1.2
43.4
44.1
1.2
42.9
43.1
.8
42.3
Net income (loss) per common share — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.42
$ .59
$ (.05)
Diluted Earnings (Loss) Per Share:
Net income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income (loss) allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107.9
2.8
$26.2
.7
$ (2.2)
—
Net income (loss) allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$105.1
$25.5
$ (2.2)
Weighted-average common shares outstanding — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Dilutive effect of stock options and restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding — assuming dilution . . . . . . . . . . . . . . . . . . . . . .
43.4
.4
43.8
42.9
.5
43.4
42.3
—
42.3
Net income (loss) per common share — assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.40
$ .59
$ (.05)
Certain options to purchase common stock and unearned restricted stock of the Company were anti-dilutive and
consisted of .6 million, 3.2 million and 4.4 million shares during 2010, 2009 and 2008, respectively. These potential shares
were not included in the computation of net income per common share—assuming dilution.
Note G—Accounts Receivable
The Company’s accounts receivable are generally unsecured. There is no customer who represented more than 10% of
the Company’s net trade receivables at November 30, 2010 and one customer who represented approximately 10.5% of net
trade receivables at November 30, 2009. The allowance for doubtful accounts was $2.0 million and $2.3 million at
November 30, 2010 and 2009, respectively. Write-offs of uncollectible accounts receivable totaled $0.5 million, $0.8 million
and $0.6 million in 2010, 2009 and 2008, respectively. The provision for bad debts totaled $0.2 million, $0.8 million and
$1.1 million in 2010, 2009 and 2008, respectively.
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note H—Inventories
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired cost of inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of acquired cost over LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obsolesence reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
2009
(Dollars in millions)
$ 32.4
5.2
45.5
83.1
(30.1)
(7.2)
$ 25.9
3.9
41.7
71.5
(26.8)
(7.2)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.8
$ 37.5
Inventories valued using the LIFO method represented $49.4 million or 59.5% and $44.9 million or 62.8% of inventories
inventory quantities declined in the Decorative Products
at November 30, 2010 and 2009, respectively. During 2010,
segment resulting in a partial liquidation of LIFO inventory layers carried at lower costs prevailing in prior years compared to
the costs of current year purchases. The effect of this partial liquidation decreased cost of products sold by $0.5 million.
During 2009, inventory quantities declined in the Performance Chemicals and Decorative Products segments resulting in a
liquidation of LIFO inventory layers which decreased cost of products sold by $0.5 million and $1.2 million for
partial
Performance Chemicals and Decorative Products, respectively.
Note I—Property, Plant and Equipment, Net
November 30,
2010
2009
(Dollars in millions)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7.8
106.7
391.8
6.4
$
8.0
103.8
402.7
6.8
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
512.7
(381.2)
521.3
(379.4)
Property, Plant and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 131.5
$ 141.9
Depreciation expense was $19.5 million, $21.8 million and $22.0 million in 2010, 2009 and 2008, respectively. Included in
depreciation and amortization expense is $15.8 million, $17.6 million and $17.7 million in 2010, 2009 and 2008, respectively,
related to depreciation of manufacturing facilities and equipment.
As of November 30, 2010 and 2009, the Company had $2.4 million and $3.0 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. Depreciation expense of software costs was $1.2 million, $1.7 million
and $1.5 million in 2010, 2009 and 2008, respectively. The Company is depreciating these costs over five years.
During the second quarter of 2010, the Company’s Decorative Products segment recognized an impairment charge of
$6.2 million to write-down machinery and equipment at its Columbus, Mississippi facility to fair value. The impairment was
caused by the loss of business attributed to weak market conditions for commercial wallcovering that are not expected to
recover to historical levels, and the transfer of certain production activities to other Company facilities to align with customer
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note I—Property, Plant and Equipment, Net (Continued)
demand. The assets were written down to their estimated fair value using a cost approach based on estimated prices the
Company would receive for the underlying assets. The Company utilized Level 3 inputs in calculating the fair value of these
assets including the estimated cost to a buyer to acquire substitute assets of comparable utility, adjusted for obsolescence.
During 2009, the Company recorded asset impairment charges of $1.1 million related to assets no longer in service.
Note J—Other Intangible Assets
On May 14, 2010, the Company acquired certain intangible assets of The Dow Chemical Company’s hollow plastic
pigment product line for $2.5 million. Those intangible assets included patents, trademarks and customer lists. The purchase
of these intangible assets will allow the Company to enhance its leading product offering to the coated paper and
paperboard industry and provide an opportunity for growth in other applications.
The fair value of these assets totaled $2.5 million on the acquisition date and were determined by utilizing a discounted
cash flow model using a risk adjusted rate developed under the weighted-average cost of capital methodology.
As of November 30, 2010 and 2009, the Company had no indefinite lived intangible assets or goodwill.
The following table summarizes finite lived intangible assets as of November 30, 2010 and 2009:
Finite lived intangible assets
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical know-how . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30, 2010
November 30, 2009
Gross
Carrying
Amount
Net
Carrying
Amount
Gross
Carrying
Amount
Net
Carrying
Amount
(Dollars in millions)
$ 9.6
6.3
2.6
1.7
3.8
$24.0
$1.4
.4
1.3
1.2
1.5
$5.8
$ 7.9
5.8
2.6
1.4
3.8
$21.5
$ .3
.1
1.4
1.1
1.5
$4.4
Amortization expense for finite lived intangible assets was $1.1 million, $1.1 million and $1.9 million for the years ended
November 30, 2010, 2009 and 2008, respectively, and is estimated to be approximately $1.2 million in 2011 progressively
decreasing to $0.3 million in 2015.
Note K—Debt and Credit Lines
Amounts due banks consist of the following debt obligations that are due within the next twelve months:
Term Loan B–current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign subsidiaries borrowings (interest at 5.1% - 5.3%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
November 30,
2010
2009
(Dollars in millions)
$1.5
3.3
$4.8
$1.5
1.8
$3.3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note K—Debt and Credit Lines (Continued)
Total foreign availability at November 30, 2010 was $7.1 million, of which $3.3 million was outstanding. Foreign
subsidiaries’ borrowings are secured by equipment, buildings and land use rights of the foreign subsidiaries. In addition, the
Company has additional foreign credit facilities for the issuance of letters of credit of $5.7 million. Outstanding letters of
credit on this facility were $0.1 million at November 30, 2010.
The Company’s long-term debt consists of the following:
Term Loan B (interest at 2.8%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Unsecured Notes (interest at 7.875%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Revolving Credit Facility (interest at 1.5%)
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2010
2009
(Dollars in millions)
$140.9
250.0
—
390.9
1.5
$142.3
—
—
142.3
1.5
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$389.4
$140.8
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 $1.5 million were paid in both 2009 and 2008 and the 2007 excess cash flow payment of $3.9 million
was paid during 2008. The Company was not required to pay an excess cash flow payment for 2009 or 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 requires the Company to maintain an interest rate swap with a notional amount
of at least $50 million. Additionally, the Term Loan provides for additional borrowings of the greater of $75 million or an
amount based on a senior secured leverage ratio, as defined in the Term Loan, $75 million, provided that certain
requirements are met including an interest coverage ratio. The Company has not utilized these additional borrowings as of
November 30, 2010. 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, 2010, the Company was in compliance with this
requirement with a ratio of 1.3 to 1.
On May 31, 2007, as required under the Term Loan, the Company entered into a 5 -year fixed rate interest rate swap
agreement with a notional amount of $50 million to convert a portion of the outstanding Term Loan from variable to fixed
rates. Under this agreement, the Company paid to the counterparty a fixed rate of 5.23% and received from the
counterparty a variable rate based on three month LIBOR. This effectively converted $50 million of the Term Loan to a fixed
rate of 7.73% when including the applicable margin of the Term Loan of 2.50%. The variable rates on the interest rate swap
and $50 million of the Term Loan were reset every three months on the same LIBOR base rate and same date, at which time
the interest was settled and recognized as adjustments to interest expense. As of November 30, 2009, the unrealized loss of
the swap of $4.6 million was recognized as a non-current liability with a corresponding amount recognized in Accumulated
Other Comprehensive Income (loss). In November 2010, the Company terminated and settled the interest rate swap with the
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note K—Debt and Credit Lines (Continued)
counter-party at a cost of $4.3 million. As required under applicable accounting guidance, this amount is recognized in
Accumulated Other Comprehensive Income (loss) and will be amortized into interest expense over the remaining original
term of the interest rate swap agreement.
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. In January 2008, the
Facility was increased to $90 million. 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 including a reserve,
as calculated by the Lenders, for the Company’s interest rate swap (“interest rate swap reserve”). 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. Outstanding letters of credit on November 30, 2010 were $2.8 million. 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 during any fiscal
quarter, the Company must then maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement.
Average excess availability is defined as the average daily amount available for borrowing under the Facility during the
Company’s fiscal quarter. The Company was in compliance with this requirement as the average excess availability did not
fall below $20 million during 2010 and averaged $58 million during the fourth quarter of 2010.
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, 2010. The Eurodollar rate is a periodic fixed rate equal to LIBOR. The applicable margin for the Eurodollar
rate will vary from 1.25% to 2.00% depending on the Company’s fixed charge coverage ratio and the margin was 1.25% at
November 30, 2010.
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, 2010.
At November 30, 2010, the Company had $68.0 million of eligible inventory and receivables to support the eligible
borrowing base which is capped at $90.0 million under the Facility. At November 30, 2010, outstanding letters of credit
under the Facility were $2.8 million, there were no amounts borrowed under the Facility and the amount available for
borrowing under the Facility was $65.2 million.
The fair value of the Company’s long-term debt at November 30, 2010 approximated $370.7 million, which is lower than
the carrying value as a result of prevailing market rates on the Company’s debt.
The effective interest rate on the Company’s U.S. debt was 4.9% and 4.5% for 2010 and 2009, respectively.
Cash paid for interest was $6.8 million, $6.9 million and $12.2 million for 2010, 2009 and 2008, respectively.
In connection with the acquisition of Eliokem International SAS (“Eliokem”) as described below and in Note R, on
November 3, 2010, the Company issued a private placement of $250 million aggregate principal amount of Senior Notes
with a 7.875% interest rate, payable semi-annually. The Senior Notes mature on November 1, 2018 and are unsecured. As of
November 30, 2010, the proceeds of the Senior Notes were held in escrow subject to completion of the Eliokem acquisition.
If the transaction had not occurred, the Company would have been required to redeem the Senior Notes. The Company
may redeem a portion of the outstanding Senior Notes any time after October 2014 at a premium above par, subject to
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note K—Debt and Credit Lines (Continued)
certain restrictions. The Senior Notes are jointly, severally and unconditionally guaranteed on a senior, unsecured basis by all
of OMNOVA Solutions Inc.’s existing and future domestic subsidiaries that from time to time guarantee obligations under
the Company’s Senior Notes, with certain exceptions (the “Guarantors”). In connection with the issuance of the Senior
Notes, the Company entered into a Registration Rights Agreement among the Company, the Guarantors and the initial
purchasers of the Senior Notes. Under the Registration Rights Agreement, the Company and the Guarantors agreed, among
other things, to use reasonable best efforts to file an exchange offer registration statement with the SEC with respect to the
Senior Notes and the guarantees thereof within 150 days after the consummation of the Acquisition.
Debt Transactions Related to Eliokem Transaction
Additionally, on December 9, 2010, the Company refinanced its existing $150 million Term Loan that had a balance of
$140.9 million as of November 30, 2010 with a new $200 million Term Loan (“New Term Loan”). The New Term Loan is
secured by the property, plant and equipment and intangible assets of the combined companies. The New Term Loan
carries a variable interest rate based on, at the Company’s option, either a Eurodollar rate or a base rate, in each case plus
an applicable margin. The Eurodollar rate is a periodic fixed rate equal to the London Inter Bank Offered Rate (“LIBOR”),
provided that the Eurodollar rate shall not be less than 1.75%. The applicable margin for the Eurodollar rate is initially 4.0%.
However, if the Company’s net leverage ratio falls below 2.75, the applicable margin will decrease to 3.75%. The base
interest rate is a fluctuating rate equal to the higher of (i) the Prime Rate, (ii) the sum of the Federal Funds Effective Rate plus
0.50% or (iii) the one month Eurodollar Rate plus 1.0%. The applicable margin for the base rate is 3.0%. However, if the
Company’s net leverage ratio falls below 2.75, the applicable margin will decrease to 2.75%. Annual principal payments
consist of $2.0 million, due in quarterly installments, and annual excess free cash flow payments as defined in the New Term
Loan agreement, with any remaining balance to be paid May 31, 2017. 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 New Term Loan is secured by all real property and equipment of the
Company’s domestic facilities and guaranteed by the domestic subsidiaries of the Company. Additionally, the New Term
Loan provides for additional borrowings of the greater of $75 million or an amount based on a senior secured leverage ratio,
as defined in the New Term Loan, provided that certain requirements are met including an interest coverage ratio of 2.0.
The New 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 New Term Loan requires the Company to
maintain an initial senior secured net leverage ratio of less than 3.25 to 1, which decreases annually by 25 basis points
through December 1, 2014 and then remains at 2.5 to 1 thereafter.
The Company issued the New Term Loan at a discount of $2.0 million receiving cash of $198 million. This discount will
be reflected as a reduction of outstanding debt and amortized over the respective term of the debt.
Also in connection with the acquisition of Eliokem, in December 2010, the Company amended and restated the Asset
Based Facility (“Amended Facility”), increasing potential availability to $100 million, which can be further increased up to
$150 million subject to additional borrowing base assets and lender approval. Total availability is dependent on domestic
accounts receivable and inventory. The Amended Facility increases the average excess availability requirement to
$25 million during any fiscal quarter but retains the fixed charge coverage ratio of 1.1 to 1 if average excess availability falls
below the $25 million. Applicable margins are based on the Company’s average daily excess availability during the previous
fiscal quarter. If average excess availability is greater than $50 million, the applicable margin will be 2.25% on Eurodollar
loans, 1.25% on base rate borrowings and .625% on commitments for unused credit lines. If average excess availability is
greater than $25 million but less than $50 million, the applicable margin will be 2.5% on Eurodollar loans, 1.5% on base rate
borrowings and 0.5% on commitments for unused credit lines. If average excess availability is less than $25 million, the
applicable margin will be 2.75% on Eurodollar loans, 1.75% on base rate borrowings and 0.375% on commitments for
unused credit lines.
Net proceeds from the notes and the New Term Loan were used for the acquisition of Eliokem (including the
repayment of Eliokem’s debt), the repayment of amounts outstanding under our existing term loan, related fees and
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note K—Debt and Credit Lines (Continued)
expenses and for general working capital purposes. The acquisition was completed on December 9, 2010. The Amended
Facility was not used to fund the acquisition.
The Company expects to incur approximately $15.7 million of deferred financing costs in connection with the issuance
of the Senior Notes and the new $200 million Term Loan. These new deferred financing costs will be amortized over the
respective terms of the underlying debt. Expense in 2011 is expected to be $2.2 million. The Company’s prior deferred
financing fees of $1.1 million as of November 30, 2010 related to the existing $150.0 million Term Loan B will be written-off in
the first quarter of 2011.
Note L—Employee Benefit Plans
Change in Pension Plan Measurement Date
Effective November 30, 2009, the Company adopted authoritative guidance issued by the Financial Accounting
Standards Board (“FASB”) related to measurement of pension and other post-retirement benefit plans, which requires the
Company to measure the assets and obligations of its pension and other post-retirement benefit plans as of the balance
sheet date. Accordingly, during 2009 the Company changed the measurement date of its pension and other post-retirement
benefit plans from August 31 to November 30 using the alternative method as prescribed in the guidance. The alternative
method requires the Company to allocate net periodic pension cost for the 15 month period of September 1, 2008 –
November 30, 2009 proportionately between 2008 and 2009. The amount allocated to 2008 was recognized in 2009 as an
adjustment to retained earnings as a change in accounting principle. The impact of this change on the Company’s financial
statements was as follows:
Prior to
Change in
Measurement
Date
Effect of
Change in
Measurement
Date
As Reported at
November 30,
2009
(Dollars in millions)
Non-Current Liabilities:
Pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 64.8
$ .6
$ 65.4
Shareholders’ Equity:
Post-retirement benefit other than pension . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8.2
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(219.3)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (82.9)
$ .2
$(.6)
$(.2)
$
8.4
$(219.9)
$ (83.1)
The change in measurement date had no impact on the Company’s statements of operations or cash flows for 2009 or
any other period presented and did not affect any financial covenants.
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 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-represented
employees.
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
The Company made $5.1 million in contributions to this plan during 2010. Contributions were neither required nor
made in 2009 and 2008 because the Company’s plan was adequately funded, using assumed returns. The Company
anticipates that it will be required, under the “Pension Protection Act of 2006” and the “Preservation of Access to Care for
Medicare Beneficiaries and Pension Relief Act of 2010” to make a contribution to its pension plan of approximately
$2.8 million in 2011. The Company anticipates pension expense to be approximately $2.6 million in 2011. Estimated future
benefit payments to retirees from the pension trust are as follows: 2011—$14.6 million, 2012—$14.8 million, 2013—
$15.1 million, 2014—$15.3 million, 2015—$15.6 million, 2016 through 2021—$81.8 million.
The Company’s non-qualified, unfunded pension plan had an accumulated benefit obligation and projected benefit
obligation of $3.7 million each as of November 30, 2010 and $3.4 million and $2.4 million, respectively, as of November 30,
2009.
As of November 30, 2010, the Company recognized a non-current liability of $69.3 million for the unfunded status of its
defined benefit pension plan and a liability of $3.7 million for its unfunded non-qualified pension plan, of which $3.6 million
was non-current. As of November 30, 2009, the Company recognized $62.1 million for the unfunded status of its defined
benefit pension plan and a liability for the unfunded status of its non-qualified pension plan of $3.4 million. The increase in
unfunded status was due to the decrease in the discount rate to 5.83% from 6.05%. The Company also recognizes 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.
Health Care Plans—The Company provides retiree medical plans for certain active and retired employees of which
there were 183 participants as of November 30, 2010. 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 post-retirement 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 the Company’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, 2010 and
would have no effect on the aggregate of the service and interest components of the net periodic cost.
Estimated future benefit payments for the retiree health care plans are as follows: 2011—$1.2 million, 2012—
$1.1 million, 2013—$1.1 million, 2014—$1.0 million, 2015—$1.0 million, 2016 through 2020—$4.5 million. Additionally, the
Company expects to receive Medicare Part D subsidies to partially offset the estimated future benefit payments of
approximately $0.2 million in each of 2011 2012, 2013, 2014 and 2015 and a cumulative total of $1.0 million for 2016 through
2021.
The Company recognized a liability of $8.7 million and $9.6 million as of November 30, 2010 and 2009, respectively, for
the unfunded status of its retiree medical plans of which $7.7 million and $8.4 million, respectively, are reported as
non-current. The current portion of the retiree health care plan was $1.0 million and $1.2 million as of November 30, 2010
and 2009, 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 unfunded status of these plans are recognized in the year in
which the change occurs through other comprehensive income (loss).
The Company expects to record non-cash retiree medical health care income of approximately $1.7 million in 2011.
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
Changes in benefit obligations and plan assets are as follows:
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid net of retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Plans
Health Care Plans
2010
2009
2010
2009
(Dollars in millions)
$229.2
—
1.6
13.4
2.9
11.1
(14.1)
$202.2
1.5
2.8
14.2
(8.4)
30.3
(13.4)
$ 9.6
—
.1
.5
(.8)
.4
(1.1)
$11.1
.2
.1
.7
—
(.5)
(2.0)
Benefit Obligation at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244.1
$229.2
$ 8.7
$ 9.6
Change in Plan Assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits and expenses paid net of retiree contributions . . . . . . . . . . . . . . . . . . . .
$163.7
—
16.4
5.1
(14.1)
$189.4
(3.1)
(9.3)
.1
(13.4)
$ —
—
—
1.1
(1.1)
$ —
—
—
2.0
(2.0)
Fair Value of Plan Assets at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$171.1
$163.7
$ —
$ —
Funded Status at November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (73.0) $ (65.5)
$(8.7)
$ (9.6)
Amounts Recognized in the Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . .
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(.1) $
(72.9)
(.1)
(65.4)
$(1.0)
(7.7)
$ (1.2)
(8.4)
Net Amount Recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (73.0) $ (65.5)
$(8.7)
$ (9.6)
As of November 30, 2010 and 2009, 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) credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(107.8) $(101.6)
(2.1)
(.2) $
$
$21.6
$ 1.2
$24.3
$ 1.5
Pension Plans
Health Care Plans
2010
2009
2010
2009
(Dollars in millions)
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
Net Periodic Benefit Cost
Pension Plans
Health Care Plans
2010
2009
2008
2010
2009
2008
(Dollars in millions)
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)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.6
13.4
.6
(15.6)
4.0
4.2
$ 2.8
14.2
.7
(15.7)
1.6
(.8)
$ 4.2
13.4
.7
(15.9)
2.6
—
$ .1
.5
(.3)
—
(2.3)
(.8)
$ .1
.7
(.3)
—
(2.4)
—
$ .1
.8
(.3)
—
(2.5)
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8.2
$ 2.8
$ 5.0
$(2.8)
$(1.9)
$(1.9)
Pension Plans
Health Care Plans
2010
2009
2008
2010
2009
2008
(Dollars in millions)
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive (Loss) Income . . . . . . . . . .
Prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(10.3) $(50.9) $(18.5) $ (.4)
—
(.8)
—
—
Total recognized in other comprehensive (loss) income . . . . . . .
Change in measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10.3)
—
4.1
1.9
(51.7)
.4
1.6
.7
(18.5)
—
2.7
.6
(.4)
—
(2.3)
(.3)
$ .5
—
.5
(.6)
(2.4)
(.3)
$ 1.4
—
1.4
—
(2.5)
(.2)
Total recognized in net periodic benefit cost and other
comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (4.3) $(49.0) $(15.2) $(3.0)
$(2.8)
$(1.3)
The estimated net loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated
Other Comprehensive Loss during 2011 are $2.4 million and $0.1 million, respectively. The estimated net gain and prior
service cost for retiree medical plans that will be amortized from Accumulated Other Comprehensive Loss during 2011 are
$1.9 million and $0.3 million, respectively.
During the second quarter of 2010, with an effective date of May 1, 2010 for its Calhoun, Georgia union-represented
employees, the Company suspended the accrual of future service benefits under its Consolidated Pension Plan. As a result,
during 2010, the Company recognized a curtailment loss of $0.1 million. During the second quarter of 2009, with an effective
date of June 1, 2009 for salaried employees and August 1, 2009 for its Mogadore, Ohio union-represented employees, the
Company suspended the accrual of future service benefits under its Consolidated Pension Plan.
In addition, due to the ongoing strike of its Decorative Products’ Columbus, Mississippi union-represented employees,
the Company recognized a curtailment loss of $4.1 million in the fourth quarter of 2010 as future service benefits for affected
employees were suspended per the terms of the expired labor contract. The Company also recognized a curtailment benefit
of $0.8 million in its health care plan related to the Columbus, Mississippi union-represented employees.
All benefits earned by affected employees through the effective dates have become fully vested with the affected
In 2009 the Company
employees eligible to receive benefits upon retirement, as described in the Plan document.
recognized a net curtailment gain of $0.8 million.
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
The accumulated benefit obligation for the Company’s defined benefit pension plan was $240.4 million and
$225.8 million at November 30, 2010 and 2009, respectively.
Pension Plans
Health Care Plans
2010
2009
2008
2010
2009
2008
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.83% 6.05% 7.36% 4.90%
6.05% 7.27% 6.55% 6.05%
8.2%
N/A N/A
N/A
N/A N/A
N/A
4.5%
N/A N/A
N/A
8/31
11/30
2028
11/30
8.0% 8.0% 8.0% N/A
4.0% 4.0% N/A
11/30
N/A
6.05%
7.36%
8.4%
4.5%
2028
11/30
N/A
N/A
7.36%
6.55%
10.0%
5.0%
2018
8/31
N/A
N/A
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 decrease in the discount rate in 2010 and 2009 is due
to lower yields 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.
The Company employs a total return on investments approach for its defined benefit pension plan assets. A mix of
equity securities, fixed income securities and alternative investments are used to maximize the long-term rate of return on
assets for the level of risk. Asset allocation at November 30, 2010, target allocation for 2010 and expected long-term rate of
return by asset category are as follows:
Asset
Category
Target
Allocation
2010
Percentage of Plan Assets
At November 30,
2010
2009
Weighted-
Average Expected
Long-Term Rate
Of Return
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50%
23%
5%
22%
51%
22%
4%
23%
48%
23%
6%
23%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
4.7%
1.0%
.3%
2.0%
8.0%
Included in Other are short-term money funds and hedge funds.
66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
The following financial assets were measured at fair value on a recurring basis during 2010:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Registered investment companies:
Total
Level 1
Level 2
Level 3
(Dollars in millions)
$
.2
$
.2
$— $ —
Equity mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87.0
38.4
87.0
38.4
Registered Investment companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125.4
125.4
Collective trust funds:
Private investment funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized loan obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collective trust funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.3
20.1
38.4
7.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
18.3
20.1
38.4
7.3
$171.3
$125.6
$— $45.7
Money market funds are valued at a net asset value (NAV) of $1.00 per share held by the Plan at year end, which
approximates fair value.
Registered investment companies are valued at quoted market prices representing the NAV of shares held by the Plan
at year end.
The fair value of the participation units owned by the Plan in the collective trust funds are based on the NAV of
participating units held by the Plan at year end.
Investments in real estate partnerships are valued at the fair value of the underlying assets based on comparable sales
value for similar assets, discounted cash flow models, appraisals and other valuation techniques.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable
value or reflective of future fair values. Furthermore, although the Plan believes its valuation methods are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different fair value measurement at the reporting date.
A reconciliation of beginning and ending Level 3 measurements is as follows:
Total
Collective
Trusts
Real Estate
Partnerships
(Dollars in millions)
Beginning balance, December 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases (settlements)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses included in funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48.6
(6.3)
3.4
$39.3
(6.3)
5.4
Ending balance, November 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45.7
$38.4
$ 9.3
—
(2.0)
$ 7.3
The following table sets forth a summary of the Plan’s investments with a reported NAV as of November 30, 2010.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SEI Structured Credit Collective Fund(a)
SEI Opportunity Collective Fund(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.1
$18.3
Fair Value
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note L—Employee Benefit Plans (Continued)
(a) The SEI Structured Credit Collective Fund seeks to provide high general returns by investing in collateralized debt obligations (“CDO’s”) and other
structured credit instruments. The SEI Structured Credit Collective Fund requires a two-year non-redemption period after which investments can be
redeemed at any time, however a 90 day redemption notification period is required. The Plan has satisfied all funding obligations related to this
investment.
(b) The SEI Opportunity Collective Fund seeks to provide returns that are less correlated with investments in traditional asset classes and that provide a return
that falls somewhere between stocks and bonds while incurring bond-like risk. Investment in the SEI Opportunity Collective Fund can be redeemed at any
time, however a 90 day redemption notification period is required. The Plan has satisfied all funding obligations related to this investment.
Defined Contribution Plans—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 are
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 Company
suspended the Company match provisions of this plan for all salaried employees between November 7, 2008 and
August 14, 2009. The non-cash cost of this plan for the Company was approximately $1.9 million in 2010 and $1.2 million in
both 2009 and 2008. The defined contribution 401(k) plan contained approximately 1.9 million shares of the Company’s
common stock at both November 30, 2010 and 2009.
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 $0.6 million in 2010, $0.6 million in 2009, and $0.8 million in 2008.
Statutory Severance Payment Obligation—The Company is required by Thailand labor law to pay statutory severance
to employees who leave employment at their retirement age or are terminated by the Company without cause. Severance
payments range from one month to ten months of the employee’s salary, based on service levels. Funding of this plan is not
required. Payments are made when the employee is entitled to receive payment. The Company recognizes a liability for the
benefit obligation based on actuarial assumptions in effect at the end of each year. The liability at November 30, 2010 and
2009 and amounts paid under this obligation during 2010 and 2009 were not significant. However, due to a reduction in
workforce during 2009, the Company recognized a curtailment gain of $0.1 million during 2009.
Note M—Contingencies and Commitments
From time to time, the Company is subject to various claims, proceedings and lawsuits related to products, services,
contracts, employment, environmental, safety, intellectual property and other matters arising. The ultimate resolution of
such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if
any, are subject to change. Actual results may materially differ from the Company’s estimates and an unfavorable resolution
of any matter could have a material adverse effect on the financial condition, results of operations and/or cash flows of the
Company. However, subject to the above and taking into account such amounts, if any, as are accrued from time to time on
the Company’s balance sheet, the Company does not believe, based on the information currently available to it, 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 $4.0 million in 2010, $4.0 million in 2009 and
$4.7 million in 2008. Future minimum commitments at November 30, 2010 for non-cancelable operating leases were
$19.3 million with annual amounts of $4.4 million in 2011, $3.7 million in 2012, $2.7 million in 2013, $2.2 million in 2014,
$0.9 million in 2015 and $5.4 million for leases after 2015.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note N—Share-Based Compensation Plans
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, 2010, approximately .7 million shares of
Company common stock remained available for grants under the Plan.
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite service period (generally the vesting period).
For stock options, the fair value calculation is estimated using a Black-Scholes based option valuation model. For
restricted stock grants, which consist of the Company’s common stock, the fair value is equal to the market price of the
Company’s stock on the date of grant. 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.
A summary of the Company’s stock option activity and related information for the years ended 2010, 2009 and 2008 is as
follows:
2010
2009
2008
Weighted
Average
Exercise
Price
$ 7.57
$ —
$13.42
$ —
$ 6.72
Weighted
Average
Exercise
Price
Shares
Outstanding at beginning of year . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,614,461
$6.32
— $ —
$7.40
$6.02
(598,160)
(47,409)
Weighted
Average
Exercise
Price
$6.72
$1.25
$8.30
$5.67
Shares
3,339,611
1,000
(683,975)
(42,175)
Shares
3,825,332
—
(485,721)
—
Outstanding at end of year . . . . . . . . . . . . . . . . . .
1,968,892
$6.00
2,614,461
$6.32
3,339,611
The weighted average grant date fair value of options granted was $0.76 during 2009.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note N—Share-Based Compensation Plans (Continued)
The following table summarizes the range of exercise prices and weighted average exercise prices for options
outstanding and exercisable at November 30, 2010 under the Company’s stock option plans:
Outstanding Options
Exercisable Options
$0.00 — $4.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5.00 — $5.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6.00 — $6.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7.00 — $8.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Exercise
Price
$4.14
$5.18
$6.51
$8.20
Number
636,125
428,425
270,791
633,551
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,968,892
$6.00
Weighted
Average
Remaining
Contractual
Life (yrs)
2.1
.6
.3
1.3
1.3
Number
635,625
428,425
270,791
633,551
1,968,392
Weighted
Average
Exercise
Price
$4.14
$5.18
$6.51
$8.20
$6.00
There were 2,613,461 and 3,337,861 stock options exercisable with weighted average prices of $6.32 and $6.72 at
November 30, 2009 and 2008, respectively.
A summary of the Company’s restricted stock activity and related information for the years ended November 30, 2010,
2009 and 2008 is as follows:
2010
2009
2008
Weighted
Average
Grant
Date Fair
Value
$3.45
$7.55
$6.14
$2.96
Shares
1,394,570
232,900
(262,270)
(31,550)
Weighted
Average
Grant
Date Fair
Value
$4.43
$2.68
$5.55
$4.28
Shares
1,079,524
610,550
(264,904)
(30,600)
Shares
576,024
559,250
(6,000)
(49,750)
Non-vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested at end of year . . . . . . . . . . . . . . . . . .
1,333,650
$3.65
1,394,570
$3.45
1,079,524
Weighted
Average
Grant
Date Fair
Value
$5.84
$3.02
$5.74
$4.87
$4.43
Compensation expense for all share-based payments, included in general and administrative expense, was $1.6 million,
$1.6 million and $1.2 million during 2010, 2009 and 2008, respectively.
As of November 30, 2010, there was $2.6 million of total unrecognized compensation expense related to non-vested
share-based compensation arrangements to be amortized over the next 2 years.
The intrinsic value of stock options exercised during 2010 and 2009 was $0.3 million and $0.1 million, respectively. No
stock options were exercised during 2008. The intrinsic value of stock options that were outstanding as of November 30,
2010 and 2009 was $5.5 million and $2.3 million, respectively.
Cash received from options exercised was $0.3 million in 2010 and $0.1 million during 2009.
Note O—Business Segment 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.
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note O—Business Segment Information (Continued)
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.
Effective March 2009, the Company realigned product lines in its Decorative Products segment to integrate cross-
functional business team structures. The Contract Interiors and Coated Fabric lines were combined into the Commercial
Wallcovering and Coated Fabrics product line and Performance Film products were moved from Coated Fabrics and
combined with Laminates into the Laminates and Performance Films product line. All prior period amounts have been
reclassified to conform to current year presentation.
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, fluorochemical and hollow plastic pigment chemistries. Performance Chemicals’ custom-
formulated products are tailored for coatings, binders and adhesives, which are used in paper, carpet, nonwovens,
construction, oil/gas drilling services, adhesives, tape, tire cord, floor polish, textiles, graphic arts, plastic parts, bio-based
polymers and various other applications. Its products provide a variety of functional properties to enhance the Company’s
customers’ products,
flow and leveling,
improved processibility and enhanced appearance.
including greater strength, adhesion, dimensional stability, water resistance,
The Performance Chemicals 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 hygiene products, engine filters, roofing mat, scrub pads, towels and
wipes), floor polish, tape, adhesives, tire cord, textiles, construction, oil/gas drilling services, plastic part coatings and ink
coating additives.
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, health care, manufactured housing and a variety of performance films applications.
The Decorative Products segment consists of two product lines. The Commercial Wallcovering and Coated Fabrics
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, marine and transportation seating,
furniture and automotive soft top. The Laminates and Performance Films product line
commercial and residential
applications include kitchen and bath cabinets, manufactured housing and recreational vehicle interiors,
flooring,
commercial and residential furniture, retail display fixtures, home furnishings, consumer electronics and a variety of industrial
film applications.
The Company’s operations are located primarily in the United States, United Kingdom, China and Thailand. There was
one customer that accounted for approximately 12% of the Company’s 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
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note O—Business Segment Information (Continued)
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,
travel and
rent,
entertainment expenses, depreciation, utility costs, outside services and amortization of deferred financing costs.
including salaries,
In 2010, segment operating profit for the Performance Chemicals segment includes a $9.7 million gain on the
termination of the RohmNova joint marketing alliance, restructuring and severance charges of $0.4 million and a net
retirement benefit plan curtailment charge of $0.1 million. The Decorative Products segment operating loss includes asset
impairment charges of $6.2 million, strike-related costs of $5.5 million, net retirement benefit plan curtailment charges of
$3.2 million, a legal settlement of $0.3 million, a customs duty settlement of $0.3 million, a reversal of an indemnification
receivable of $0.3 million and restructuring and severance charges of $0.2 million. Performance Chemicals’ 2009 operating
profit includes asset write-offs of $0.6 million, a net retirement benefit plan charge of $0.2 million and restructuring and
severance charges of $0.2 million. Decorative Products’ 2009 operating profit includes restructuring and severance charges
of $1.8 million, $0.6 million of clean-up and repair costs related to a flood, asset write-offs of $0.5 million, a reversal of an
indemnification receivable of $0.3 million and a net retirement benefit plan curtailment gain of $0.7 million.
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.
2010
2009
2008
(Dollars in millions)
Net Sales
Performance Chemicals
Paper and Carpet Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$330.1
197.8
$249.2
147.6
$337.0
184.6
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$527.9
$396.8
$521.6
Decorative Products
Commercial Wallcovering and Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$219.9
98.4
$217.7
81.9
$252.2
95.6
Total Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$318.3
$299.6
$347.8
Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$846.2
$696.4
$869.4
Segment Operating Profit (Loss)
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 73.3
(18.0)
$ 48.0
1.6
$ 25.2
(6.5)
Total segment operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expenses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55.3
(8.7)
(28.1)
49.6
(8.1)
(13.6)
18.7
(13.0)
(7.7)
Income (Loss) Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18.5
$ 27.9
$ (2.0)
(a)
Included in corporate expenses for 2010 are a fair value adjustment of $9.2 million related to a Euro currency option collar which the Company put in
place to hedge currency risk for the Eliokem acquisition and $5.5 million of acquisition and integration costs.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note O—Business Segment Information (Continued)
Total Assets
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Expenditures
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decorative Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GEOGRAPHIC INFORMATION
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
2010
2009
2008
(Dollars in millions)
$138.1
175.7
412.2
$136.9
179.8
21.3
$148.3
191.2
12.1
$726.0
$338.0
$351.6
$
8.2
5.1
1.5
$
5.3
4.7
.4
$
7.5
5.9
1.4
$ 14.8
$ 10.4
$ 14.8
$
9.3
11.0
.3
$
9.9
12.7
.3
$ 11.0
12.5
.4
$ 20.6
$ 22.9
$ 23.9
2010
2009
2008
(Dollars in millions)
$626.3
26.2
71.9
121.8
$495.5
26.7
64.2
110.0
$661.6
26.3
79.9
101.6
$846.2
$696.4
$869.4
$ 50.3
1.5
3.5
$ 39.2
4.7
5.7
$ 18.1
4.4
(3.8)
$ 55.3
$ 49.6
$ 18.7
$597.3
39.3
89.4
$207.5
50.6
79.9
$230.8
44.0
76.8
$726.0
$338.0
$351.6
$ 98.0
11.5
27.8
$104.9
12.8
28.6
$116.3
12.5
30.4
$137.3
$146.3
$159.2
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note P—Financial Instruments and Fair Value Measurements
Financial Risk Management Objectives and Policies
The Company is exposed primarily to credit, interest rate and currency exchange rate risks which arise in the normal
course of business.
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and
contractual obligations to the Company, as and when they fall due. The primary credit risk for the Company is its receivable
accounts. The Company has established credit limits for customers and monitors their balances to mitigate its risk of loss. At
November 30, 2010 and 2009, there were no significant concentrations of credit risk. There was one customer who
represented approximately 10.5% of the Company’s net trade receivables at November 30, 2009. The maximum exposure to
credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.
Foreign Currency Risk
The Company incurs foreign currency risk on sales and purchases denominated in other currencies than the functional
currency. The currencies giving rise to this risk are primarily the GB Pound Sterling, the Euro, Thai Baht and Chinese Yuan.
Foreign currency exchange contracts are used by the Company’s Thailand subsidiary to manage risks from the change in
exchange rate of the Thai Baht on sales made in U.S. dollars. These forward contracts are used on a continuing basis for
periods of less than one year, consistent with the underlying hedged transactions. The hedging minimizes the impact of
foreign exchange rate movements on the Company’s operating results. The notional amount of outstanding foreign
exchange contracts, translated at current rates, was $4.1 million as of November 30, 2010. As of November 30, 2010, the fair
value of forward contracts was $0.1 million and was recorded as other current assets.
In connection with the Company’s acquisition of Eliokem International SAS, which was consummated on
December 9, 2010, the Company entered into a zero cost forward currency collar (“Currency Collar”) in October 2010 to
hedge changes in exchange rate movements of the Euro to the U.S. dollar. Due to changes in the exchange rate for the
Euro, the fair value of the Currency Collar as of November 30, 2010 was a liability of $9.2 million. The Company recognized
the fair value of this Currency Collar as a current liability with an offsetting expense included in other expense (income). The
Company settled this Currency Collar with the counter-party on December 1, 2010 for $9.2 million.
Fair Value Measurements
The following financial assets and liabilities were measured at fair value on a recurring basis during 2010:
Financial Assets
Foreign currency exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities
Foreign Currency Collar
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
Level 1
Level 2
Level 3
(Dollars in millions)
$ .1
$ .1
$9.2
$9.2
$ —
$ —
$9.2
$9.2
$ .1
$ .1
$—
$—
$—
$—
$—
$—
Assets and liabilities that are within the provisions of Accounting Standards Codification 820 are recorded at fair value
using market and income valuation approaches and considering the Company’s and counterparty’s credit risk. The
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note P—Financial Instruments and Fair Value Measurements (Continued)
Company uses the market approach and the income approach to value assets and liabilities as appropriate. The Company’s
foreign currency exchange contracts are not exchange traded instruments, however, they are valued based on observable
inputs for similar assets or liabilities and accordingly are classified as level 2 inputs.
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness
The $250 million Senior Notes are jointly, severally and unconditionally guaranteed on a senior unsecured basis by all of
OMNOVA Solution Inc.’s existing and future domestic subsidiaries that from time to time guarantee obligations under the
Company’s Senior Notes with certain exceptions (the “Guarantors”). Presented below are the condensed financial
its combined Guarantor subsidiaries and its combined Non-
statements of OMNOVA Solutions (Parent) as borrower,
Guarantor subsidiaries.
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2010
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in millions)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$670.1
546.2
$ —
—
$193.7
155.8
$(17.6)
(17.2)
$846.2
684.8
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
123.9
71.6
16.1
.6
6.2
8.5
5.5
.7
109.2
Income (loss) from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . .
14.7
(88.6)
—
.8
—
—
—
—
—
(1.7)
(.9)
.9
—
37.9
27.2
4.5
—
—
.2
—
3.0
34.9
3.0
(.8)
(.4)
—
—
—
—
—
—
(.3)
(.3)
(.1)
—
161.4
99.6
20.6
.6
6.2
8.7
5.5
1.7
142.9
18.5
(89.4)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$103.3
$ .9
$
3.8
$
(.1)
$107.9
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2009
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in millions)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$534.0
415.5
$ —
—
$174.1
133.1
$(11.7)
(11.9)
$696.4
536.7
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net
Income from continuing operations before income taxes . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118.5
72.7
17.8
1.1
1.0
7.8
(1.1)
99.3
19.2
.5
—
1.1
—
—
—
—
(2.1)
(1.0)
1.0
—
41.0
26.1
5.1
—
1.1
.3
1.0
33.6
7.4
1.2
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18.7
$ 1.0
$
6.2
$
.2
—
—
—
—
—
(.1)
(.1)
.3
—
.3
159.7
99.9
22.9
1.1
2.1
8.1
(2.3)
131.8
27.9
1.7
$ 26.2
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2008
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in millions)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$704.8
602.7
$ —
—
$181.5
145.4
$(16.9)
(16.7)
$869.4
731.4
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity earnings in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net
Income (loss) from continuing operations before income taxes . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102.1
73.2
19.1
—
.5
—
12.7
(1.6)
103.9
(1.8)
.2
—
.8
—
—
—
—
—
(3.0)
(2.2)
2.2
—
36.1
30.8
4.8
—
.1
(.2)
.3
2.8
38.6
(2.5)
—
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2.0)
$ 2.2
$ (2.5)
$
(.2)
—
—
—
—
—
—
(.3)
(.3)
.1
—
.1
138.0
104.8
23.9
—
.6
(.2)
13.0
(2.1)
140.0
(2.0)
.2
$ (2.2)
76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Financial Position November 30, 2010
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in millions)
ASSETS:
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . .
Trademarks and other intangible assets, net
. . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 49.6
253.1
66.0
26.4
6.0
1.3
402.4
94.7
3.3
85.9
—
148.2
$ —
—
—
—
—
—
—
—
—
—
64.9
—
$ 26.0
—
40.9
19.9
—
2.2
89.0
36.8
2.5
.6
—
1.2
$ —
—
(.1)
(.5)
—
—
(.6)
—
—
(.3)
(64.9)
(137.7)
$ 75.6
253.1
106.8
45.8
6.0
3.5
490.8
131.5
5.8
86.2
—
11.7
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$734.5
$ 64.9
$130.1
$(203.5)
$726.0
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Amounts due to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and personal property taxes . . . . . . . . . . . . .
Employee benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits other than pensions . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.5
59.1
14.7
2.4
—
9.6
87.3
389.4
7.6
72.8
—
7.1
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
564.2
Shareholders’ Equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional contributed capital
. . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . .
4.5
9.7
244.2
(1.3)
(86.8)
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .
170.3
$ —
—
—
—
—
.6
.6
—
—
—
—
97.1
97.7
—
—
(34.7)
—
1.9
(32.8)
$
3.3
29.6
2.6
—
—
.2
35.7
—
—
.5
2.0
39.1
77.3
—
75.9
(23.9)
—
.8
52.8
$ —
(.1)
—
—
—
(.6)
(.7)
—
—
—
(.3)
(135.6)
(136.6)
—
232.4
(297.6)
—
(1.7)
(66.9)
$
4.8
88.6
17.3
2.4
—
9.8
122.9
389.4
7.6
73.3
1.7
7.7
602.6
4.5
318.0
(112.0)
(1.3)
(85.8)
123.4
Total Liabilities and Shareholders’ Equity . . . . . . . . . .
$734.5
$ 64.9
$130.1
$(203.5)
$726.0
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Financial Position November 30, 2009
OMNOVA
Solutions
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in Millions)
ASSETS:
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . .
Trademarks and other intangible assets, net
. . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11.7
65.4
21.1
—
1.2
99.4
103.2
1.8
8.1
—
149.5
$ —
—
—
—
—
—
—
—
—
64.8
—
$ 29.8
40.5
16.3
—
1.2
87.8
38.7
2.6
1.5
—
1.6
$ —
—
.1
—
—
.1
—
—
(8.4)
(64.8)
(147.9)
$ 41.5
105.9
37.5
—
2.4
187.3
141.9
4.4
1.2
—
3.2
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$362.0
$ 64.8
$132.2
$(221.0)
$338.0
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Amounts due to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and personal property taxes . . . . . . . . . . . . .
Employee benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits other than pensions . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.5
37.7
13.7
2.6
.9
2.9
59.3
140.8
8.4
65.4
7.2
13.0
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
294.1
Shareholders’ Equity
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Additional contributed capital
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . .
4.4
5.7
141.0
(.4)
(82.8)
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .
67.9
$ —
—
—
—
—
.6
.6
—
—
—
—
97.9
98.5
—
—
(35.6)
—
1.9
(33.7)
$
1.8
26.7
2.7
—
—
1.1
32.3
—
—
—
2.1
50.7
85.1
—
75.9
(27.7)
—
(1.1)
47.1
$ —
—
—
—
—
(.6)
(.6)
—
—
—
(8.4)
(145.8)
(154.8)
—
232.5
(297.6)
—
(1.1)
(66.2)
$
3.3
64.4
16.4
2.6
.9
4.0
91.6
140.8
8.4
65.4
.9
15.8
322.9
4.4
314.1
(219.9)
(.4)
(83.1)
15.1
Total Liabilities and Shareholders’ Equity . . . . . . . . . .
$362.0
$ 64.8
$132.2
$(221.0)
$338.0
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2010
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
provided by (used in) operating activities:
Fixed asset write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from dissolution of joint marketing alliance . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment for currency collar . . . . . . . . . . . . . . . . .
Settlement of interest rate swap . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . .
Provision for obsolete inventory . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution to defined benefit plan . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided By (Used In) Operating Activities . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from dissolution of joint marketing alliance . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . .
Proceeds from asset disposals . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . .
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt (payments), net . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Net Cash Provided by Financing Activities . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . .
Net Increase (Decrease) in Cash and Cash Equivalents . .
Cash and cash equivalents at beginning of period . . . . . . . .
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in Millions)
$ 103.3
$ .9
$ 3.8
$ (.1)
$107.9
6.2
(9.7)
16.1
—
9.2
4.3
3.5
(.2)
(.3)
(91.9)
.2
(5.7)
6.2
(.1)
(5.1)
16.0
52.0
(13.0)
(2.5)
9.7
.4
—
(253.1)
(258.5)
662.1
(413.6)
—
(.1)
248.4
(4.0)
37.9
11.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(.9)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4.5
(.1)
—
—
—
(.1)
.1
.7
.8
(4.2)
.6
.4
—
(8.0)
(1.5)
(1.8)
—
—
—
.5
—
(1.3)
—
—
1.5
.1
1.6
(2.6)
(3.8)
29.8
—
—
—
(.1)
—
—
—
—
—
(1.1)
—
.5
(.1)
.1
—
(4.7)
(5.5)
—
—
—
—
—
—
—
—
—
—
—
—
5.5
—
—
6.2
(9.7)
20.6
(.2)
9.2
4.3
3.5
(.3)
(.2)
(92.3)
1.0
(9.4)
6.7
.4
(5.1)
2.4
45.0
(14.8)
(2.5)
9.7
.4
.5
(253.1)
(259.8)
662.1
(413.6)
1.5
—
250.0
(1.1)
34.1
41.5
Cash and Cash Equivalents at End of Period . . . . . . . . . . .
$ 49.6
$—
$26.0
$ —
$ 75.6
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2009
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in Millions)
$ 18.7
$1.0
$ 6.2
$ .3
$ 26.2
Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (Gain) on disposal of fixed assets . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . .
Provision for obsolete inventories . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided By (Used In) Operating Activities . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . .
Proceeds from asset disposals . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . .
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt (payments), net . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Net Cash (Used In) Provided By Financing Activities . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . .
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . .
17.8
1.3
2.3
.7
(.3)
—
.6
20.5
(1.0)
.5
(.9)
60.2
(8.5)
.8
.6
(7.1)
514.2
(555.5)
—
.1
(41.2)
(.3)
11.6
.1
—
—
—
—
—
—
—
—
(.2)
—
(.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
Cash and Cash Equivalents at End of Period . . . . . . . . . . .
$ 11.7
$ —
80
5.1
—
—
—
1.1
(1.5)
(.6)
3.0
.1
2.2
1.2
16.8
(1.9)
—
—
(1.9)
—
—
(2.9)
(.2)
(3.1)
.7
12.5
17.3
$29.8
—
(.3)
—
—
—
1.3
—
(.8)
.4
(2.6)
(1.1)
(2.8)
—
—
—
—
—
—
—
.1
.1
2.7
—
—
22.9
1.0
2.3
.7
.8
(.2)
—
22.7
(.7)
.1
(1.6)
74.2
(10.4)
.8
.6
(9.0)
514.2
(555.5)
(2.9)
—
(44.2)
3.1
24.1
17.4
$ —
$ 41.5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note Q—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2008
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
(Dollars in Millions)
$
(2.0)
$ 2.2
$ (2.5)
$ .1
$ (2.2)
—
19.1
.1
2.4
(.2)
(.6)
—
.7
(1.4)
(14.0)
9.9
(35.4)
(21.4)
(12.9)
—
—
—
(12.9)
728.6
(691.1)
(3.8)
.8
34.5
(.4)
(.2)
.3
.1
—
—
—
—
—
—
—
—
.3
—
(19.0)
14.4
(2.1)
—
—
—
—
—
—
—
—
—
—
2.1
—
—
(.2)
4.8
—
—
1.2
1.0
.9
(.7)
(3.4)
3.0
11.7
14.8
30.6
(1.9)
(42.2)
—
—
(44.1)
—
—
1.0
23.5
24.5
(6.0)
5.0
12.3
—
—
—
—
—
—
(1.3)
.2
.7
(.5)
(2.0)
13.3
10.5
—
17.0
—
—
17.0
—
—
—
(24.0)
(24.0)
(3.5)
—
—
(.2)
23.9
.1
2.4
1.0
.4
(.4)
.2
(3.8)
(11.5)
.6
7.1
17.6
(14.8)
(25.2)
—
—
(40.0)
728.6
(691.1)
(2.8)
.3
35.0
(7.8)
4.8
12.6
$ —
$ 17.3
$ —
$ 17.4
Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity earnings in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock compensation expense . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . .
Provision for obsolete inventories . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash (Used In) Provided by Operating Activities . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of businesses, less cash acquired . . . . . . . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . .
Proceeds from asset disposals . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used In) Investing Activities . . . . .
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt (payments), net . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Net Cash Provided by (Used In) 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 . . . . . . . .
Cash and Cash Equivalents at End of Period . . . . . . . . . . .
$
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note R—Subsequent Events – Purchase Transaction (Unaudited)
On December 9, 2010, the Company completed the acquisition of all the outstanding shares of Eliokem International
SAS (“Eliokem”) from AXA Investment Managers Private Equity Europe and the other holders of equity securities of Eliokem
for an aggregate purchase price of $299.7 million in cash, subject to working capital and capital expenditure adjustments.
The Company used cash on hand, the net proceeds from the issuance of its 7.875% Senior Notes due 2018 (“Senior Notes”)
and proceeds from a new $200 million Term Loan to fund the acquisition, including the repayment of Eliokem debt. The
balance of the proceeds were used for repayment of the Company’s existing term loan and related costs. Costs associated
with the Senior Note issuance and the Eliokem acquisition included in the Company’s results for 2010 include $5.5 million of
acquisition and integration expense and an additional $1.6 million of interest expense on the Senior Notes.
Eliokem is a worldwide manufacturer of specialty chemicals used in a diverse range of niche applications including
coating resins, elastomeric modifiers, antioxidants, oilfield chemicals and latices for specialty applications. Eliokem is
headquartered in Villejust, France and has facilities located in France, the United States, China and India. The Company
expects to include Eliokem’s operations in its Performance Chemicals segment.
The transaction will be accounted for under acquisition accounting using the fair value concepts defined in ASC
Subtopic 820-10, “Fair Value Measurements and Disclosures.” ASC Subtopic 805-10, “Business Combinations” requires,
among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The preliminary estimate of the fair values of assets acquired and liabilities assumed as of the closing of the Acquisition
were allocated to each of Eliokem’s assets, liabilities and identifiable intangible assets. The excess of purchase price over the
estimated fair values of assets acquired and liabilities assumed is allocated to goodwill.
The preliminary estimate of the fair values of assets acquired and liabilities assumed (in millions) is as follows:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
$117.5
118.8
80.7
3.3
.6
81.2
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
402.1
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(50.3)
(44.2)
(7.9)
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$299.7
The preliminary allocation of the purchase price is based on preliminary estimates of the fair value of assets acquired
and liabilities assumed, and the related income tax impact of the acquisition accounting adjustments. The Company is in the
process of determining the final working capital adjustment, the fair value of tangible and intangible assets acquired as well
as reviewing the impact of historical tax attributes and the related impact on the preliminary purchase price allocation. The
final fair valuations may be different from the preliminary valuations. The final allocation of the purchase price will be
determined after completion of a final analysis to determine the fair values of the tangible assets, identifiable intangible
assets, and liabilities as of the date the acquisition is complete. Increases or decreases in the fair value of the net assets may
change the amount of the purchase price allocated to goodwill and other assets and liabilities. Goodwill arising from this
acquisition is primarily attributable to many factors including synergies expected from combining the operations of Eliokem
with our existing Performance Chemicals operations, as well as benefits derived from expansion of Performance Chemicals’
manufacturing capabilities.
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
Note R—Subsequent Events – Purchase Transaction (Unaudited) (Continued)
The preliminary estimated fair value of the identifiable intangible assets and their weighted-average useful lives have
been estimated as follows (dollars in millions):
Estimated
Fair Value
Estimated
Useful Life
Definite lived assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.2
36.2
12.4
13 years
10 – 14 years
4 – 14 years
Total definite lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.8
Indefinite lived assets:
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.9
N/A
Total identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$80.7
Definite lived intangible assets will be amortized over their estimated useful lives. Intangible assets with indefinite useful
lives and goodwill will not be amortized but will be tested for impairment at least annually.
The unaudited pro forma effect of the acquisition of Eliokem on the Company’s net sales, net income and net income
per share, had the acquisition occurred on December 1, 2008 and 2009, respectively, is as follows:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,134.6
$ 102.9
2.31
$
2.29
$
$920.1
$ 24.6
.56
$
.56
$
Year Ended November 30,
2010
2009
(Dollars in millions,
except per share
amounts)
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—Continued
OMNOVA SOLUTIONS INC.
Quarterly Financial Data (Unaudited)
2010
February 28, May 31,
August 31,
November 30,
Three Months Ended
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit(1)(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses(3) . . . . . . . . . . . . . . . . . . . . . . .
Gain on dissolution of joint marketing alliance . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Fair value adjustment on a foreign currency collar
Reversal of deferred tax valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments and write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per share(5)
(Dollars in millions, except per share amounts)
$208.0
$ 34.8
$
(.1)
$ (2.9)
$ —
$ (9.2)
$ 98.2
$ —
$ 81.5
$227.9
$226.4
$ 39.1
$ 47.2
(.2)
$ — $
$ (1.9)
(.7)
$
$
$ —
9.7
$ — $ —
$ — $ —
$ —
$ (6.2)
3.5
$
$ 15.1
$183.9
$ 40.0
$
(.3)
$ —
$ —
$ —
$ —
$ —
7.8
$
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock price range per share — high . . . . . . . . . . . . . . . . . . . . . . . .
— low . . . . . . . . . . . . . . . . . . . . . . . . .
.18
$
$
.17
$ 6.94
$ 5.09
.34
$
$
.33
$ 8.58
$ 5.99
.08
$
$
.08
$ 8.69
$ 6.00
$ 1.82
$ 1.80
$ 8.89
$ 6.15
2009
February 28, May 31,
August 31,
November 30,
Three Months Ended
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit(1)(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flood related expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments and write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per share(5)
(Dollars in millions, except per share amounts)
$188.8
$ 44.0
(.1)
$
(.1)
$
$
(.5)
$ 11.1
$186.1
$161.3
$ 44.0
$ 40.0
(.3)
$
$
(.8)
$ — $
(.5)
$ —
(.6)
$
$ 10.1
5.1
$
$160.2
$ 31.7
$
(.9)
$ —
$ —
(.1)
$
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock price range per share — high . . . . . . . . . . . . . . . . . . . . . . . .
— low . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
$ 1.84
.60
$
.12
$
$
.12
$ 2.83
.75
$
.23
$
$
.23
$ 6.50
$ 2.50
.26
$
$
.25
$ 8.08
$ 4.24
(1) Gross profit excludes depreciation expense. Depreciation expense related to manufacturing facilities and equipment
was $4.2 million, $4.2 million, $3.6 million and $3.7 million for the three months ended February 28, May 31, August 31
and November 30, 2010 and $4.3 million, $4.4 million, $4.6 million and $4.4 million for the three months ended
February 28, May 31, August 31 and November 30, 2009, respectively.
(2) Gross profit includes net LIFO inventory reserve adjustments of $0.6 million, $1.4 million, $0.9 million and $0.5 million for
the three months ended February 28, May 31, August 31 and November 30, 2010, respectively, and $2.7 million,
$2.2 million, $(0.4) million and $1.5 million for the three months ended February 28, May 31, August 31 and
November 30, 2009. Gross profit in 2010 also includes strike-related costs of $0.3 million, $2.6 million and $0.4 million for
the three months ended May 31, 2010, August 31, 2010 and November 30, respectively, and net retirement benefit plan
curtailment charges of $3.3 million for the three months ended November 30, 2010.
(3) Acquisition and integration expense are related to the Company’s December 9, 2010 acquisition of Eliokem
International SAS.
(4) During the third quarter of 2009, the Company’s Jeannette, Pennsylvania facility experienced a flood for which the
(5)
Company incurred cleanup and restoration costs of $0.6 million, net of insurance proceeds.
The sum of the quarterly earnings per share amounts may not equal the annual amount due to changes in the number
of shares outstanding during the year.
84
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, 2010. Based on its evaluation,
management has determined that the Company’s disclosure controls and procedures are effective. Further, during the
quarter ended November 30, 2010, 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 38 and 39 of this report, respectively, 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 2011 Annual
Meeting of Shareholders is set forth on pages 6 and 7 of the Company’s 2011 Proxy Statement and is incorporated herein by
reference. Information with respect to directors of the Company whose terms extend beyond the 2011 Annual Meeting of
Shareholders is set forth on pages 8 through 11 of the Company’s 2011 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
pages 19 and 20 of the Company’s 2011 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 page 21 of the Company’s 2011 Proxy Statement and is incorporated herein by reference.
Also see Executive Officers of the Registrant on page 17 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
63 of the Company’s 2011 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 26 through 61 of the Company’s 2011 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 62 and
63 of the Company’s 2011 Proxy Statement and is incorporated herein by reference.
85
Equity Compensation Plan Information
The following table sets forth certain information as of November 30, 2010, regarding the Company’s only existing
compensation plan, the Second Amended and Restated 1999 Equity and Performance Incentive Plan. This plan has been
approved by the Company’s shareholders. See Note N to the Consolidated Financial Statements for further information
regarding the Company’s share-based compensation plans.
Equity Compensation Plan Information
as of November 30, 2010
Plan Category
Equity compensation plans approved by security holders . . . .
Equity compensation plans not approved by security
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
1,968,862
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,968,892
Weighted-average
exercise price of
outstanding
options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
$6.00
N/A
$6.00
679,056
N/A
679,056
Item 13. Certain Relationships and Related Transactions, Director Independence
Information regarding certain relationships and related transactions and director independence is set forth on page 24
of the Company’s 2011 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, 2010 and 2009, the pre-approval policies and procedures of the Audit Committee
of the Company’s Board of Directors and related information is set forth on pages 12 and 13 of the Company’s 2011 Proxy
Statement and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Consolidated Financial Statements:
PART IV
The following consolidated financial statements of OMNOVA Solutions Inc. are included in Item 8:
Consolidated Statements of Operations for the years ended November 30, 2010, 2009 and 2008
Consolidated Balance Sheets at November 30, 2010 and 2009
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended November 30, 2010, 2009 and 2008
Notes to the Consolidated Financial Statements
86
(a)(2) Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
EXHIBIT INDEX
(a)(3) Exhibits
Exhibit
Description
2.1
3.2**
3.4**
4.1
4.2
10.3†
10.5†
10.6†
10.7†
10.8†
10.9†
10.11†
10.12†
ACQUISITION AGREEMENTS
Sale and Purchase Agreement among OMNOVA Solutions Inc., AXA LBO Fund III-A, AXA LBO Fund III-B and
the other holders of equity securities of Eliokem International SAS (incorporated by reference to the same
numbered exhibit to the Company’s Current Report on Form 8-K filed November 24, 2010 (File No. 1-15147)).
CHARTER DOCUMENTS
Form of Amended and Restated Articles of Incorporation of OMNOVA Solutions Inc.
Amended and Restated Code of Regulations of OMNOVA Solutions. Inc.
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Indenture dated as of November 3, 2010 by and among OMNOVA Solutions Inc., the Guarantors (as defined
therein) and Wells Fargo Bank, National Association, as trustee (incorporated by reference to the same
numbered exhibit to the Company’s Current Report on Form 8-K filed November 4, 2010 (File No. 1-15147)).
Registration Rights Agreement, dated as of November 3, 2010, by and among OMNOVA Solutions Inc., the
Guarantors (as defined therein) and the initial purchasers party thereto (incorporated by reference to exhibit 10.1
of the Company’s Current Report on Form 8-K filed November 4, 2010 (File No. 1-15147)).
MATERIAL CONTRACTS
Amended and Restated Employment Agreement dated December 31, 2009 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, 2008 (File No. 1-15147)).
Amended and Restated Severance Agreement dated December 31, 2009 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, 2008 (File No. 1-15147)).
Form of Amended and Restated Severance Agreement granted to certain executive officers of OMNOVA
Solutions (other than the officer identified above) (incorporated by reference to the same numbered exhibit to
the Company’s Annual Report on Form 10-K for the year ended November 30, 2008 (File No. 1-15147)).
OMNOVA Solutions Second Amended and Restated 1999 Equity and Performance Incentive Plan, as amended
and restated effective January 1, 2009 (incorporated by reference to the same numbered exhibit to the
Company’s Annual Report on Form 10-K for the year ended November 30, 2008 (File No. 1-15147)).
OMNOVA Solutions Deferred Compensation Plan for Nonemployee Directors, as amended and restated
effective January 1, 2009 (incorporated by reference to the same numbered exhibit to the Company’s Annual
Report on Form 10-K for the year ended November 30, 2008 (File No. 1-15147)).
Retirement Plan for Nonemployee Directors of OMNOVA Solutions, as amended and restated effective
January 1, 2009 (incorporated by reference to the same numbered exhibit to the Company’s Annual Report on
Form 10-K for the year ended November 30, 2008 (File No. 1-15147)).
Savings Benefits Restoration Plan for Salaried Employees of OMNOVA Solutions (incorporated by reference to
the same numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended November 30,
2008 (File No. 1-15147)).
Pension Benefits Restoration Plan for Salaried Employees of OMNOVA Solutions (incorporated by reference to
the same numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended November 30,
2008 (File No. 1-15147)).
87
Exhibit
Description
10.13
10.14†
10.22†
10.23†
10.24†
10.26†
10.30
10.32
21.1
23.1
24.1
31.1
31.2
32.1
OMNOVA Solutions Corporate Officers Severance Plan, effective January 1, 2009 (incorporated by reference to
the same numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended November 30,
2008 (File No. 1-15147)).
OMNOVA Solutions Long-Term Incentive Program, as amended and restated effective January 1, 2009
(incorporated by reference to the same numbered exhibit to the Company’s Annual Report on Form 10-K for the
year ended November 30, 2008 (File No. 1-15147)).
Form of Deferred 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, 2009 (File No. 1-15147)).
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, 2009 (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)).
OMNOVA Solutions Executive Incentive Compensation, as amended and restated effective January 1, 2009
(incorporated by reference to the same numbered exhibit to the Company’s Annual Report on Form 10-K for the
year ended November 30, 2008 (File No. 1-15147)).
Second Amended and Restated Term Loan Credit Agreement dated as of December 9, 2010 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.
Second Amended and Restated Credit Agreement dated as of December 9, 2010 by and among OMNOVA
Solutions Inc. and Eliokem Inc., as borrowers, the financial institutions party thereto, as Lenders, and J.P. Morgan
Chase Bank N.A., as agent for the Lenders.
SUBSIDIARIES OF THE REGISTRANT
Listing of Subsidiaries.
CONSENT OF EXPERTS
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
POWER OF ATTORNEY
Powers of Attorney executed by D. J. D’Antoni, M. J. Merriman, S. W. Percy, A. R. Rothwell, L. B. Porcellato, 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 Registration Statement on Form 10 (File No. 1-15147).
**
† Management contract or compensatory arrangement.
88
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.
SIGNATURES
Date: January 24, 2011
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
K. M. McMullen
Chairman, Chief Executive Officer and
January 24, 2011
President
/s/ M. E. HICKS
M. E. Hicks
*
D. J. D’Antoni
*
M. J. Merriman
*
S. W. Percy
*
L. B. Porcellato
*
A. R. Rothwell
*
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
January 24, 2011
Officer
Director
Director
Director
Director
Director
Director
Director
89
January 24, 2011
January 24, 2011
January 24, 2011
January 24, 2011
January 24, 2011
January 24, 2011
January 24, 2011
January 24, 2011
CERTIFICATIONS
I, Kevin M. McMullen, certify that:
1. I have reviewed this Annual Report on Form 10-K of OMNOVA Solutions Inc.;
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/ Kevin M. McMullen
Name: Kevin M. McMullen
Title: Chairman, Chief Executive Officer and
President
Date: January 24, 2011
90
CERTIFICATIONS
I, Michael E. Hicks, certify that:
1. I have reviewed this Annual Report on Form 10-K of OMNOVA Solutions Inc.;
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 24, 2011
91
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of OMNOVA Solutions Inc. (the “Company”) on Form 10-K for the year ended
November 30, 2010, 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.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
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.
Date: January 24, 2011
/s/ Kevin M. McMullen
Name: Kevin M. McMullen
Title: Chairman, Chief Executive Officer and President
/s/ Michael E. Hicks
Name: Michael E. Hicks
Title: Senior Vice President and Chief
Financial Officer
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.
92
Directors & Officers
Board of Directors
DAvID J. D’An TOnI 2
Retired Senior Vice President
STEvEn W. PERCy 1,3
Retired Chairman and
and Group Operating Officer,
Chief Executive Officer,
Ashland Inc.
BP America Inc.
KEvIn M. MCMullEn 3
lARRy PORCEllATO 2
Chairman, Chief Executive Officer
Chief Executive Officer,
and President,
OMNOVA Solutions Inc.
MIChAEl J. MERRIMA n 2,3
Operating Advisor,
The Homax Group, Inc.
AllAn R. ROThWEll 1
Retired President,
Voridian Company
Resilience Capital Partners LLC
(a division of Eastman Chemical Co.)
Officers
WIllIAM R. S EElBACh 2
committees
Operating Partner,
The Riverside Company
ROBERT A. S TEFAnKO 1
Retired Chairman and
Executive Vice President –
Finance and Administration,
A. Schulman, Inc.
1 Audit Committee
Chairman:
Steven W. Percy
2 Compensation and Corporate
Governance Committee
Chairman:
Michael J. Merriman
3 Executive Committee
Chairman:
Kevin M. McMullen
KEvIn M. MCMullEn
JAMES C. lEMAy
JAMES J. hOhMAn
KRISTIn E C. SyRvAlIn
Chairman, Chief Executive Officer
Senior Vice President, Business
Vice President; President,
Vice President, Human Resources
and President
Development; General Counsel
Performance Chemicals
Administration;
MIChAEl E. hICKS
Senior Vice President and
Chief Financial Officer
ChESTER W. F Ox
Vice President, Treasurer
DOuglAS E. WEngER
Senior Vice President and
Chief Information Officer
ROBERT h. CO lEMAn
President, Decorative Products
JAy T. A uSTIn
Vice President, Global
Sourcing and Logistics
Assistant General Counsel
and Secretary
Corporate Information
Shareholder Information
nySE AnnuAl CEO CERTIFICATIOn
BuyDIRECT
The annual CEO certification required by
BuyDIRECT is a direct purchase,
AnnuAl MEETIng
OF ShAREh Ol DERS
Section 303A.12(a) of the New York Stock
sale and dividend reinvestment
March 17, 2011 at 9:00 a.m.
OMnOvA SOluTIOnS
FOunDATIO n
175 Ghent Road
Exchange Listed Company Manual was
plan available to shareholders and
Bertram Conference Center Annex
Fairlawn, OH 44333-3300
submitted by Kevin M. McMullen without
interested first-time investors.
qualification on April 22, 2010.
It offers a convenient method of
600 N. Aurora Road
Aurora, OH 44202
330-869-4289
COMMunICATIOn S
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.
For more information regarding
the BuyDIRECT program, contact
BNY Mellon Shareowner Services
at 1-866-220-6360.
COMMOn STOCK lISTIng
New York Stock Exchange
Ticker Symbol: OMN
TR AnSFER AgEnT AnD RE gISTR AR
The Bank of New York Mellon
1-866-220-6360
1-201-680-6685 (outside U.S. and Canada)
1-800-231-5469 (hearing impaired – TTY phone)
shrrelations@bnymellon.com (email)
http://www.bnymellon.com/shareowner/
equityaccess (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
InDEPEn DEn T REgISTERED
General inquiries:
PuBlIC ACCOunTIng F IRM
Corporate Communications
Ernst & Young LLP
Akron, OH
ShARE hOlDER SERvICES
1-800-735-5160
InvESTOR RE lATIOnS COnTACT
Michael E. Hicks
Senior Vice President and
Chief Financial Officer
330-869-4411
330-869-4435
information@omnova.com
Investor packets:
330-869-4411
ar_requests@omnova.com
InTERnET WEBSITE
www.omnova.com
OMNOVA Solutions is an equal
opportunity employer.
i
n
o
t
a
E
&
x
D
y
b
n
g
i
s
e
D
Photo Credit: Jeep ® with Sailcloth Replace-a-top ® photo courtesy of Bestop, Inc.
PAPER STOCK: The cover and inside glossy pages of this report are printed using vegetable-based inks on paper coated with OMNOVA’s GenCryl Pt ® latex.
Cert no. SW-COC-002546
GENCRYL PT is a registered trademark of OMNOVA Solutions Inc. PLIOLITE is a registered trademark of ELIOKEM.JEEP is a registered trademark of Chrysler Group LLC. SAILCLOTH REPLACE-A-TOP is a registered trademark of Bestop, Inc. © 2011 OMNOVA Solutions Inc.OMNOVA Solutions ■ 175 Ghent Road ■ Fairlawn, OH 44333 ■ 330.869.4200 ■ www.omnova.com