All trademarks – OMNOVA Solutions © 2014 OMNOVA Solutions Inc.OMNOVA SOLUTIONS175 GHENT ROAD, FAIRLAWN, OH 44333330.869.4200WWW.OMNOVA.COM 2013 ANNUAL REPORT AND 10KENERGIZEDENERGIZED OMNOVA SOLUTIONS 2013 ANNUAL REPORT45098_Cover_Wt.indd 11/28/14 5:30 PM FINANCIAL HIGHLIGHTS Years Ended November 30,(Dollars in millions, except per share data)201320122011NET SALESPerformance Chemicals $ 773.0 $ 864.5 $ 951.9 Engineered Surfaces 245.1 261.0 249.2 $ 1,018.1 $ 1,125.5 $ 1,201.1 SEGMENT OPERATING PROFIT (LOSS)Performance Chemicals $ 64.1 $ 89.6 $ 86.5 Engineered Surfaces 15.6 3.8 (1.3) Interest expense (31.9) (36.5) (38.0)Corporate expenses (19.8) (20.0) (17.1)Deferred financing fees write-off (1.5) — —Income tax expense (6.0) (11.2) (13.4)Income from continuing operations 20.5 25.7 16.7 Income (loss) from discontinued operations, net of tax (0.9) 1.9 (19.5)NET INCOME (LOSS) $ 19.6 $ 27.6 $ (2.8) INCOME PER SHARE – DILUTEDIncome per share – continuing operations $ 0.44 $ 0.56 $ 0.37 Income (loss) per share – discontinued operations, net of tax (0.02) 0.04 (0.43)Net income (loss) per share – diluted $ 0.42 $ 0.60 $ (0.06) OTHER DATACapital expenditures $ 28.9 $ 32.8 $ 24.1 Depreciation and amortization $ 33.6 $ 32.0 $ 33.5 Number of employees at year-end 2,300 2,390 2,300 PERFORMANCE CHEMICALS Value-added emulsion polymers and specialty chemicals used in coatings, adhesives, binders and other applicationsENGINEERED SURFACESFunctional laminate and coated fabric surfaces for transportation, furnishings, new construction and refurbishmentREVENUES35%21%19%10%9%6%Refurbishment and New ConstructionTransportationPaper andPackagingIndustrial/OtherPersonal HygieneOil & Gas Design by Dix & Eaton OfficersKEVIN M. MCMULLENChairman, Chief Executive Officer and PresidentMICHAEL E. HICKSSenior Vice President and Chief Financial OfficerMICHAEL A. QUINNSenior Vice President and Chief Human Resources Officer JAMES C. LEMAYSenior Vice President, Corporate Development; General CounselDOUGLAS E. WENGERSenior Vice President and Chief Information OfficerCHESTER W. FOXVice President, Treasurer JAMES J. HOHMANVice President; President, Performance ChemicalsDAVID H. MAYNARDPresident, Engineered SurfacesJAY T. AUSTINVice President, Global Sourcing and LogisticsKRISTINE C. SYRVALINVice President, Human Resources Administration; Assistant General Counsel and SecretaryShareholder InformationNYSE ANNUAL CEO CERTIFICATIONThe annual CEO certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual was submitted by Kevin M. McMullen without qualification on April 19, 2013.TRANSFER AGENT AND REGISTRARComputershare 1-866-220-6360 1-201-680-6578 (outside U.S. and Canada) 1-800-952-9245 (hearing impaired)Address shareholder inquiries to: OMNOVA Solutions c/o Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 or 250 Royall St. Canton, MA 02021 (overnight delivery/private couriers/ registered mail)Questions and inquiries: www.computershare.com BUYDIRECTBuyDIRECT is a direct purchase, sale and dividend reinvestment plan available to shareholders and interested first-time investors. It offers a convenient method of 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 Computershare at 1-866-220-6360.COMMON STOCK LISTINGNew York Stock Exchange Ticker Symbol: OMNANNUAL MEETING OF SHAREHOLDERSMarch 19, 2014 at 9:00 a.m. Hilton Akron – Fairlawn 3180 West Market Street Fairlawn, OH 44333INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMErnst & Young LLP Akron, OHSHAREHOLDER SERVICES1-800-735-5160INVESTOR RELATIONS CONTACTMichael E. Hicks Senior Vice President and Chief Financial Officer 330-869-4411OMNOVA SOLUTIONS FOUNDATION175 Ghent Road Fairlawn, OH 44333-3300 330-869-4289COMMUNICATIONSGeneral inquiries: Corporate Communications 330-869-4200 information@omnova.com Investor packets: 330-869-4411 ar_requests@omnova.com INTERNET WEBSITEwww.omnova.comOMNOVA Solutions is an equal opportunity employer. CORPORATE INFORMATIONBoard of DirectorsDAVID J. D’ANTONI 2Retired Senior Vice President and Group Operating Officer, Ashland Inc.KEVIN M. MCMULLEN 3Chairman, Chief Executive Officer and President, OMNOVA Solutions Inc.MICHAEL J. MERRIMAN 2,3,4Operating Advisor, Resilience Capital Partners LLCSTEVEN W. PERCY 1,3Retired Chairman and Chief Executive Officer, BP America Inc.LARRY PORCELLATO 2Chief Executive Officer, The Homax Group, Inc.ALLAN R. ROTHWELL 1Retired Executive Vice President, Eastman Chemical CompanyWILLIAM R. SEELBACH 2Senior Advisor, The Riverside CompanyROBERT A. STEFANKO 1Retired Chairman and Executive Vice President – Finance and Administration, A. Schulman, Inc.COMMITTEES1 Audit Committee Chairman: Steven W. Percy2 Compensation and Corporate Governance Committee Chairman: Michael J. Merriman 3 Executive Committee Chairman: Kevin M. McMullen4 Presiding DirectorDIRECTORS & OFFICERS PAPER STOCK: The cover and inside glossy pages of this report are printed using vegetable-based inks on paper coated with OMNOVA’s GenCryl® latex.45098_Cover_Wt.indd 21/28/14 5:30 PM T O O U R S H A R E H O L D E R S
Kevin McMullen, Chairman and CEO
After two years of record consolidated segment operating profit
from our continuing businesses, OMNOVA Solutions’ earnings took
a step back in 2013, reflecting challenges in certain markets as well
as increased investment to broaden our global footprint. Nonetheless,
the Company delivered strong volume and profit improvement in a
number of key product lines and geographies.
Investments we have made in these areas in recent years are bearing fruit and showing promise for even
greater future growth potential. With improving conditions in many of our markets, steady progress in key
businesses, and the additional actions I will discuss in this Annual Report, we at OMNOVA are energized by a
future filled with promise.
Overall, 2013 results were impacted primarily by market weakness and greater competitive pressures
in one of our North American product lines – Performance Materials, which includes chemicals for coated
paper and carpeting. Despite these pressures, we remain committed to taking necessary actions to defend
our position in these core markets by leveraging our well-positioned, world-class manufacturing facilities and
new, innovative product solutions that add value to our customers. In addition, we are pursuing opportunities
adjacent to these core markets, such as specialty papers, packaging and commercial carpet.
At the same time, we are very excited by the performance and potential of many of our other businesses.
While we expect all parts of the Company to improve and deliver value, we believe three broad market areas
that encompass our existing product lines present the greatest opportunities for near-term growth.
The first is the recovery in the construction market, where both of our business segments, Performance
Chemicals and Engineered Surfaces, deliver a wide range of functional and design solutions for new buildings
and refurbishment. We believe the recovery in construction is only in the second inning of a nine-inning game,
but it appears to be a solid beginning that is gaining momentum. The products that will benefit most from
this recovery are specialty coatings, elastomeric modifiers, carpet binders and construction materials in our
Performance Chemicals segment, and laminates and contract upholstery in our Engineered Surfaces segment.
Second, the emerging and rapidly growing markets of China and Southeast Asia also appear to be
strengthening again after a brief pause. We have enhanced our position to serve these markets, supported
by OMNOVA’s three plants in China – one of which completed an expansion in 2013. Both business segments
O M N O V A S O L U T I O N S 1
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delivered strong results for the year from our three
operational actions we have taken to strengthen the profit
China plants. Along with the improvement we have seen
potential of this business. Early in 2013, we completed the
in our Thailand-based business, we are in an excellent
transition of coated fabric products from our Columbus,
position to leverage our technologies, our growing
Mississippi facility to other OMNOVA plants and ceased
commercial and technical resources, and our expanding
manufacturing at the Columbus site. The move was
manufacturing infrastructure to take advantage of the
made to consolidate production following the 2012 sale
wealth of opportunities in the region. (See pages 6 and 7
of the commercial wallcovering business, thus lowering
of this Annual Report for examples of the exciting, diverse
ongoing overhead and manufacturing costs, and better
applications enabled by our investments in building
utilizing our global manufacturing footprint. At the same
capability in Asia.)
time, the business took actions to reduce fixed costs at
The third area with tremendous potential is our
plants in Asia, which contributed to a $5.7 million profit
specialty chemical solutions for enhanced oil and gas
improvement there. In addition, Engineered Surfaces
exploration and production. Volumes in this business were
implemented targeted price increases and improved
up 14%, and we see strong growth prospects ahead. The
working capital management.
global oilfield market is expected to grow 8% per year
Consolidated sales for 2013 were $1.018 billion.
through 2016, and we have broadened OMNOVA’s reach to
Volumes were down 3% in Performance Chemicals and
provide proprietary chemistries across a growing number
8% in Engineered Surfaces. The decline in Engineered
of oil and gas applications to capture these opportunities.
Surfaces was due to the Columbus transition, a strategic
Our ability to succeed in these three areas and across
decision to upgrade our product mix and exit unprofitable
the Company has been strengthened by the improvements
coated fabric sales for residential furniture in China, and a
we have made in our business model, investments in
very large one-time sale to a laminates customer in 2012
critical assets and technologies that enable us to provide
that affected year-over-year comparisons. The global
differentiated solutions to our customers, actions to
Coated Fabrics product line made solid strides in 2013 to
enhance the effectiveness of our global organization, and
improve return on sales from 3.2% to 7.3%, moving closer
strategic decisions that have and will continue to positively
to the Company target of 10% ROS.
impact our product portfolio and profitability. While we
The Company maintained its long history of
made progress on many fronts in 2013, we still have work
strong cash generation during 2013. Cash increased
to do to profitably grow our franchise overall. That is our
$16.4 million, while debt declined $4.1 million, for a
number-one priority.
$20.5 million Net Debt reduction. Simultaneously, we also
F I N A N C I A L S U M M A R Y
funded key investments for global manufacturing and
capabilities expansion, and for the repurposing of certain
In 2013, OMNOVA Solutions’ Income from Continuing
manufacturing assets in the United States.
Operations was $20.5 million, or $0.44 per diluted share.
That compares to $25.7 million, or $0.56 per diluted
P E R F O R M A N C E C H E M I C A L S
share, in 2012. On a consolidated basis, OMNOVA earned
While the Performance Chemicals business segment
$84.8 million in Adjusted Segment Operating Profit for 2013
experienced a disappointing year overall, the issues in the
after setting records in both of the previous two years.
North American paper and carpet markets masked the
The Performance Chemicals business segment
progress in our specialty product lines. Specialties now
delivered $67.1 million in Adjusted Segment Operating
comprise the majority of sales and profit in Performance
Profit in 2013, compared with its record-setting
Chemicals – with almost twice the sales of paper and
$89.6 million in the prior year.
carpet – and provide strong engines for growth.
With an $8.4 million improvement from 2012,
I have already mentioned our excitement about oil
Engineered Surfaces generated $17.7 million in Adjusted
and gas. In 2013, we hired a new general manager from
Segment Operating Profit, its best performance since
the oil industry and realigned the global organization. We
2001. In fact, this was the third consecutive year of
are aggressively reaching out to participate in a broader
improvement and the result of a number of strategic and
range of drilling applications where our proprietary
2
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OMNOVA SOLUTIONS 3OIL & GAS DRILLINGchemistries can add value. Whereas we traditionally focused primarily on solutions for very specialized high temperature, high pressure drilling fluids in technically challenging drilling environments, we are now partnering with a larger and more diverse set of global oil service companies to deliver technologies for drilling fluids, cementing and well stimulation across a wide array of operating conditions and locations. Our specialty coatings product line increased volumes by 7% in 2013, and operating profit expanded correspondingly. This was particularly encouraging given the prolonged recession in Western Europe, where our coatings business has had its biggest presence. This business was part of our 2010 acquisition of ELIOKEM. The strength in coatings this past year is due in part to an improving Western European economy but also reflects the “The tremendous growth in oil and gas exploration is presenting outstanding opportunities for OMNOVA’s proprietary chemistries. Oilfield service and production companies are eager to partner with suppliers that relish a challenge and have the technologies that can meet the rigors of a variety of drilling environments. We are that kind of supplier.”– JEFF CHAAPEL General Manager, OMNOVA Oil & Gas OMNOVA drilling resins and latices prevent fluid lossOMNOVA additives enhance cement flow, leak control, strengthShaftBorehole CasingGeologic FormationCement to complete BoreholeBarrier Layer During DrillingDrill Bit45098_Text_Wt.indd 31/28/14 5:38 PM 4“It is exciting to be advancing a long legacy of technical leadership in coatings innovation. As a lab technician, I am part of the team that develops new ideas into practical solutions. It is so satisfying to see the results of my work on the walls and facades of buildings around me, and to know that our coatings are helping to protect bridges, concrete and metal structures around the world.”– NATHALIE MARTINS Laboratory Technician, Villejust, FranceCONSTRUCTIONRESIDENTIAL & COMMERCIAL APPLICATIONS• window gaskets and interior profilesCOATINGS• stainblocking primers• exterior masonry• direct-to-metal paints• intumescent (fire resistant) coatings• opacifiersMATERIALS• tape• exterior sheathing• PET roofing mat• cement• flooring felt• ceiling tiles• industrial flooring tiles• sports surfaces• pool liners• deckingINFRASTRUCTURE/MAINTENANCE• hoses, cables • cement• floor polishes/sealers 45098_Text_Wt.indd 41/28/14 5:39 PM OMNOVA SOLUTIONS 5“OMNOVA’s success in laminates is the result of our ability to perform in high-use environments. Retailers and restaurant owners are looking for store fixtures, tables, counters and architectural elements that are easy to maintain, won’t chip or crack, and whose appearance contributes to the overall ‘look and feel’ of a space. I think OMNOVA understands that the perfect blend of function and design can create the distinctive user experience our customers are looking for.”– KELLY BOEDER Senior Commercial Market Manager, Laminateswork we have done to aggressively globalize the business, including a move into the markets of Eastern Europe and the Middle East, where our products perform quite well in harsh climates and technically demanding applications. In Asia, we have introduced new products and expanded resources to make our coatings more accessible to this burgeoning market. Likewise, in North America we have stepped up our efforts with a new marketing manager, more focused sales and account management resources, and the introduction of new specialty coating products that considerably broaden our solutions for this market. Other specialty chemical product lines also experienced strong growth in 2013. These included our saturant and release systems in tape for construction and industrial uses; our elastomeric modification products that provide improved performance properties for thermoplastics used in applications such as cable jacketing, window gaskets, hoses and tubing; our Wingstay® L antioxidants, long recognized as the industry standard for the protection of thermoplastic, latex and rubber products used in a broad range of high performance applications; and our leading global coating and binder technologies for nonwovens that impart excellent fluid transmission and protection properties, wet and dry strength, and dimensional stability to nonwoven fabrics used in disposable applications such as hygiene products, towels and wipes, and durable applications such as PET roofing mat. Across the global specialty chemicals landscape, our customers’ needs and requirements are changing, and OMNOVA is changing with them. In China, where a rapidly growing middle class is consuming an ever broader array of products, • luxury vinyl tile flooring• cabinetry• retail store fixtures• contract furniture upholstery and laminatesFURNISHINGS• carpet• panel systems• digital wall muralsPhoto courtesy Tarkett NA45098_Text_Wt.indd 51/28/14 5:42 PM 6EMERGING MARKETSRUBBER/PLASTIC COMPONENTS• molded and reinforced rubber • tire cord • gloves• antioxidantsSEATING UPHOLSTERY• auto OEMs• mass transit • motorcycles• door and instrument panelsCONSTRUCTION• carpet• tape • coatings• industrial and agricultural film liners• packaging“The growth of the transportation industry in China has been astounding! The quality of the automotive offering is rapidly improving and beginning to rival that of carmakers around the world. A big part of that is OMNOVA’s coated fabrics for seating that meet global standards for durability, cleanability and style. Our team is proud to be right in the middle of the exciting advances in our country.” – JIMMY GOH Director, Commercial and Technology Development, Engineered Surfaces, China45098_Text_Wt.indd 61/28/14 5:40 PM we completed the expansion of our specialty chemical production facility in Caojing in order to grow with the transportation, nonwovens, personal care, tape, carpet, packaging, construction and coatings markets. The Caojing plant was first commissioned in 2011, and we quickly recognized that further expansion would allow us to leverage our value-added technologies to serve exciting, growing market opportunities. We continue to build out our specialty chemicals marketing, sales and technical resources in Asia to provide greater market coverage and customer support.In North America, where styrene butadiene (SB) industry capacity utilization has declined, we converted certain excess SB capacity to the manufacturing of hollow plastic pigments (HPP), a high performance chemistry that provides superior opacity to a variety of end-use products. Until recently, the product had been toll-produced by a third party. With complete control over product development and dedicated manufacturing assets, we are now working to broaden the application of this technology into a wider range of specialty markets.OMNOVA announced in mid-2013 an investment to redirect additional SB capacity to the production of styrene acrylic and other specialty emulsion chemistries at our Mogadore, Ohio site, making it the most diverse facility in our Performance Chemicals business, if not the entire North American specialty polymer industry. Following the transition, OMNOVA expects to save approximately $4 million per year in lower operating costs while significantly enhancing our capabilities to serve customers. This action, along with the HPP conversion, will bring OMNOVA’s emulsion capacity utilization back near historical levels by converting approximately 120 million pounds of SB capacity. In Europe, work began in 2013 to add new acrylic emulsion capabilities at our plant in Le Havre, France. The project will be completed in mid-2014, further strengthening our specialty coatings leadership for applications such as exterior masonry, stain-blocking primers, direct-to-metal and intumescent paints, floor care polishes and sealers, and opacifiers, to name a few. Market qualification of many of these new water-based solutions is already under way.ENGINEERED SURFACESIf you have followed OMNOVA Solutions over the years, you know that we have taken numerous actions to improve the profitability of the Engineered Surfaces business. Our Laminates product line leads the way. While 2013 performance was slightly off the 2012 record, we continue to believe in the potential for sustainable, profitable growth in this business given the product performance, design and cost-in-use advantages of our materials, along with our highly responsive service. Our laminates are used in a wide range of construction and refurbishment projects, from retail display fixtures to specialty acrylic shower components, and in many of the most recognized and respected brand-name kitchen and bath cabinets in North America. In 2013, we won a OMNOVA SOLUTIONS 7• hygiene nonwovens• personal care products“With continued urbanization and increasing consumer consumption, we see significant growth opportunities for our products in China and emerging Asian markets. Our expanded specialty latex emulsions facility in Caojing, China is in an ideal position to serve these burgeoning markets. We are partnering with global customers to provide products that tie directly into the needs of a rapidly growing middle class and improving standard of living.”– JOHN WEI Vice President and General Manager, OMNOVA China and Performance Chemicals Asia45098_Text_Wt.indd 71/28/14 5:41 PM 8contract with a major cabinetmaker, which will increase our participation in the construction industry recovery. Likewise, we are well-positioned to partner with the manufacturers of luxury vinyl tile, who have announced significant investments in North America over the next 12 to 24 months to produce luxury vinyl tile flooring. This is a growing category in flooring that offers increased durability in rich, elegant designs that are hard to distinguish from ceramic tiles and natural hardwood floors. Our printed laminates deliver the critical aesthetics for this flooring, while our performance films provide the protective overlay.Our near-term goal for laminates is to accelerate the broadening of our North American customer base in markets where we have demonstrated a strong value proposition, as well as growing in adjacent markets. In addition, we intend to extend our success to the rest of the world beyond North America, particularly Asia. We will leverage our existing manufacturing capabilities and growing customer relationships to accomplish this.In 2013, we made a concerted effort to improve the returns of our global coated fabrics business by refocusing on areas where we can offer clear value to our customers and by streamlining our approach. As a result, we began to see real progress. With stronger regional leadership, a reduction in fixed costs, our exit from unprofitable business, and a renewed emphasis on reducing costs and improving quality using LEAN Six Sigma, our global coated fabrics business has reversed course and is on a path to improved performance. We have developed a solid position in the transportation and automotive industry in China and Southeast Asia in particular, where we are one of the biggest suppliers of auto upholstery and interiors to the major OEMs and Tier Ones. Furthermore, we have invested in our North American distribution center to service our North American coated fabrics customer base.ENERGIZEDCommercial excellence is a key pillar to achieving profitable growth, and during the past few years we have made significant investments in sharpening and globalizing our processes and capabilities. The importance of marketing, technical and sales excellence may seem obvious, but I think few companies achieve the true excellence to which we aspire. Through this process, we are pushing ourselves to look at our existing and adjacent markets from a broader and deeper perspective and then identify – on a global basis – target segments for profitable growth. At the heart of our ability to deliver an enhanced and truly distinctive value proposition to our customers is a more thorough understanding of customers and their markets. Through this process, we will develop deeper insights into customer needs and tightly couple those insights to more targeted and focused innovation and new product development. These efforts will be enhanced by tools such as OMNOVA’s new Customer Relationship Management (CRM) system, which was implemented in 2013. CRM provides the means to track, coordinate and manage the sales process, as well as execute our commercial launch plans.As we look to 2014 and beyond, we are focused on increasing profitable growth by leveraging our expanding global footprint, our commercial excellence processes, and our investments in new capabilities and facilities. In closing, I want to thank our dedicated team of OMNOVA associates, who turned in their best safety performance ever in 2013. They are committed to accelerating growth for our Company and energized by our limitless potential. I also want to thank our shareholders. We are working harder – and smarter – to reward your confidence in us by delivering sustainable shareholder value. We truly appreciate your continued support of OMNOVA Solutions.Kevin M. McMullenChairman and CEO “At the heart of our ability to deliver an enhanced and truly distinctive value proposition to our customers is a more thorough understanding of customers and their markets.”45098_Text_Wt.indd 81/28/14 5:41 PM N O N - G A A P A N D O T H E R F I N A N C I A L M E A S U R E S
Reconciliation Tables for: (A) Adjusted Segment Operating Profit, (B) Adjusted Income from
Continuing Operations, and (C) Adjusted EBITDA and Net Debt
This Annual Report includes Adjusted Segment Operating Profit, Adjusted Income from Continuing Operations, and Adjusted Diluted Earnings Per Share from Continuing
Operations, Adjusted EBITDA and Net Debt which are non-GAAP financial measures as defined by the Securities and Exchange Commission. Management reviews
the 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 the adjusted information is useful for providing investors with an understanding of the Company’s business and operating
performance. Management excludes the items shown in the tables below because management does not consider them to be reflective of normal operations. These
adjusted financial measurements are not measurements of financial performance under GAAP and such financial measures should not be considered as an alternative
to Segment Operating Profit, Net Income, Diluted Earnings Per Share or other measures of financial performance determined in accordance with GAAP. These non-GAAP
financial measures may not be comparable to similarly titled measures reported by other companies. The table below provides the reconciliation of these financial
measures to the comparable GAAP financial measures.
Presented in Table C is the Company’s Net Leverage Ratio (Net Debt/Adjusted EBITDA) calculation. Adjusted EBITDA is presented as defined in the Company’s Term
Loan B Agreement and the calculation of Net Debt includes restricted cash and outstanding letters of credit.
(A) Adjusted Segment Operating Profit Reconciliation
Years Ended November 30,
(Dollars in millions)
PERFORMANCE CHEMICALS OPERATING PROFIT
Restructuring and severance
Gain on asset sales
Accelerated depreciation for production transfer
Intangible asset impairment
Customer trade receivable write-off
Fair value adjustment to Eliokem inventory
Total adjustments to Performance Chemicals operating profit
PERFORMANCE CHEMICALS ADJUSTED SEGMENT OPERATING PROFIT
ENGINEERED SURFACES OPERATING PROFIT (LOSS)
Restructuring and severance, and other
Gain on asset sales
Asset impairment and facility closure costs
Coated fabrics manufacturing transition costs
Note receivable write-down
Total adjustments to Engineered Surfaces operating profit
ENGINEERED SURFACES ADJUSTED SEGMENT OPERATING PROFIT
TOTAL ADJUSTED SEGMENT OPERATING PROFIT
(B) Adjusted Income from Continuing Operations Reconciliation and
Adjusted Diluted Earnings Per Share
INCOME FROM CONTINUING OPERATIONS
Performance Chemicals segment operating profit adjustments per Table (A)
Engineered Surfaces segment operating profit adjustments per Table (A)
Corporate restructuring and other
Acquisition and integration expenses
Deferred financing fees write-off
Income tax expense adjustment(1)
Tax benefit from one-time tax items
Tax expense for liquidation of foreign subsidiary
Total earnings impact of adjusted items
ADJUSTED INCOME FROM CONTINUING OPERATIONS
ADJUSTED DILUTED EARNINGS PER SHARE FROM ADJUSTED CONTINUING INCOME
2013
2012
2011
$ 64.1
2.1
$ 89.6
$ 86.5
—
1.1
(0.3)
—
—
1.0
0.2
—
—
3.0
$ 67.1
$ 15.6
3.0
(5.1)
2.6
0.7
0.9
2.1
$ 17.7
$ 84.8
—
—
—
—
—
0.9
—
2.7
—
4.7
$ 89.6
$ 91.2
$ 3.8
$ (1.3)
1.5
0.7
—
—
1.0
3.7
3.0
—
—
—
5.5
4.4
$ 9.3
$ 3.1
$ 98.9
$ 94.3
$ 20.5
3.0
2.1
0.1
—
$ 25.7
$ 16.7
—
4.7
5.5
4.4
—
0.2
—
2.3
1.5
—
1.0
(2.9)
(1.7)
(5.6)
(1.1)
—
2.7
$ 23.2
$ 0.50
(1.0)
—
—
1.1
2.8
8.1
$ 28.5
$ 24.8
$ 0.63
$ 0.55
(1)The additional income tax expense is estimated as the additional tax expense attributed to the excluded items using an estimated effective tax rate of 30%.
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O M N O V A S O L U T I O N S 9
(C) Net Leverage Ratio (Net Debt/Adjusted EBITDA) Calculation
Adjusted EBITDA as Defined by the Term Loan B Agreement
(Dollars in millions)
Years Ended November 30,
2013
2012
Income from Continuing Operations
Interest expense
Amortization of deferred financing costs
Income tax
Depreciation and amortization
EBITDA
Restructuring, severance and other
Asset impairments
Non-cash stock compensation
Gain on asset sales
Deferred financing fees write-off
Other
ADJUSTED EBITDA
$ 20.5
29.6
2.3
6.0
33.6
$ 92.0
5.0
0.2
2.2
(4.9)
1.5
1.0
$ 97.0
$ 25.7
33.8
2.7
11.2
32.0
105.4
1.0
1.0
4.5
—
—
—
$ 111.9
Net Debt as Defined by the Term Loan B Agreement
(Dollars in millions)
Years Ended November 30,
2013
2012
Senior secured notes
Term loan
Foreign debt
Letters of credit
Capital leases
TOTAL DEBT
Cash
Restricted cash
TOTAL CASH
NET DEBT
$ 250.0
190.4
2.6
2.1
3.0
$ 451.7
$ 164.9
—
$ 164.9
$ 250.0
196.0
7.6
2.2
—
$ 455.8
$ 143.0
5.5
$ 148.5
$ 286.8
$ 307.3
NET DEBT / ADJUSTED EBITDA
2.96 X
2.75 X
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, debt and cash levels, 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.
1 0
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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, 2013
Commission File Number 1-15147
OMNOVA Solutions Inc.
(Exact name of registrant as specified in its charter)
Ohio
(State of Incorporation)
34-1897652
(I.R.S. Employer Identification No.)
175 Ghent Road, Fairlawn, Ohio
(Address of principal executive offices)
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 ‘ No Í
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 Í 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 $336,831,908 based on the closing
price per share of $7.41 on May 31, 2013, the last business day of the registrant’s most recently completed second quarter.
As of January 21, 2014, there were 47,167,582 outstanding shares of the Company’s Common Stock, 10¢ par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2014 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, 2013
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
35
37
87
87
87
87
87
87
88
88
15
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
91
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 engineered surfaces for a variety of
commercial, industrial and residential end uses. Our products provide a variety of important functional and aesthetic benefits to
hundreds of products that people use daily. We hold leading positions in key market categories, which have been built through
innovative products, customized product solutions, strong technical expertise, well-established distribution channels, recognized
brands and long-standing customer relationships. We have strategically located manufacturing, technical and sales facilities in
North America, Europe, China, Thailand and India to service our broad customer base.
OMNOVA operates two business segments: Performance Chemicals and Engineered Surfaces. In December 2012, following
the sale and exit from the commercial wallcovering business, the Company changed the name of its Decorative Products segment to
Engineered Surfaces to better reflect the role of innovation and the functional performance features that are valued in its served
markets. Of our 2013 net sales, 76% were derived from the Performance Chemicals segment and 24% were derived from the
Engineered Surfaces segment. Financial information relating to the Company’s business segments is set forth in Note R to the
Consolidated Financial Statements of this report.
Performance Chemicals
Background
Our Performance Chemicals segment began in 1952 as part of The General Tire & Rubber Company (later known as
GenCorp). 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 six U.S. and four international manufacturing sites with expanded
capabilities, chemistries and applications, as well as technology centers and sales offices in the U.S., Europe and Asia.
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, nitrile butadiene
(NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, fluorochemicals and bio-based chemistries. We are a
leading North American producer and supplier of SB latex for a wide range of applications. We operate well maintained,
strategically located, cost competitive production facilities in North America, Europe, China and India. Our custom-formulated
products include hollow plastic pigments, resins, binders, adhesives, specialty rubbers, antioxidants and elastomeric modifiers
which are used in paper, specialty coatings, carpet, nonwovens, construction, oil/gas drilling and recovery, adhesives, tape, tires,
floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses 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, manufacture and deliver highly customized products that provide innovative and value-added solutions
to customers across a broad array of end-markets and applications.
1
The following table shows major Performance Chemicals products, end-use applications and brand names:
Product Line
% of Performance
Chemicals Fiscal
2013 Net Sales
Performance Materials
35%
Specialty Chemicals
65%
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, 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, hollow
plastic pigments,
solid & glyoxal
resins, phenolic and
diphenylamine
antioxidants, NBR
powders and
dispersions,
elastomers, silicone
emulsions,
polyethylene resins
and fluorochemicals
Nonwovens (such as
hygiene products,
engine filters and
roofing
mat), oil/gas drilling,
construction,
adhesives, tapes, tire
cord, floor care,
textiles, graphic arts,
polymer stabilization,
industrial hoses,
specialty coatings
(such as masonry,
direct to metal, and
stain blocking
primers), elastomeric
modification (brake
linings, PVC
windows, automotive
interiors)
GENCAL, GENFLO,
GENCRYL, GENCRYL
PT, NOVAGREEN,
REACTOPAQUE,
SUNKOTE,
SUNBOND,
SUNKEM, SUNCRYL,
SUNSIZE,
ECOKOTE,
UNIQ-PRINT,
SEQUABOND,
SUNREZ,
SEQUAREZ,
OMNABLOC,
OMNAGLIDE,
OMNATUF
GENFLO, GENCRYL,
GENTAC,
OMNAGLO,
OMNAPEL,
SEQUABOND,
SUNCRYL, SECOAT,
SECRYL, MOR-GLO,
LYTRON,
MOR-SHINE,
MOR-FLO,
NOVACRYL,
ACRYGEN, MYKON,
PERMAFRESH,
SEQUAPEL,
POLYFOX, X-CAPE,
GENGLAZE,
MYKOSOFT,
MYKOSIL, NORANE,
GENCEAL,
WINGSTAY,
PLIOLITE, PLIOWAY,
PLIOTEC,
HYDRO PLIOLITE,
CHEMIGUM,
SUNIGUM,
PLIOCORD
Performance Materials. 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 and binder chemistries for coating applications in the paper, packaging and paperboard industries. Our commitment to
product innovation has enhanced our market position by creating products for the paper industry that improve the printability,
2
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, 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, while meeting the stringent manufacturing, environmental, odor, flammability and flexible installation requirements of our
customers. Our strong historical position in residential carpeting has been enhanced by new products to serve that market as well
as innovations in commercial carpet backing binders that provide moisture barrier and other properties, enabling the replacement
of higher cost polyurethane binders. Sales of our Performance Materials products represented 26.7% of our consolidated net sales
for 2013, 30.5% for 2012 and 33.2% for 2011.
Specialty Chemicals. OMNOVA is a leading global supplier of polymers, dispersions, antioxidants, elastomers, and
specialty chemicals for a variety of product categories. Applications for our specialty polymers and chemicals include specialty
coatings, nonwovens (such as disposable hygiene products, engine filters, roofing mat, scrub pads), construction, oil/gas drilling
and recovery, adhesives, tape, tire cord, floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses, bio-
based polymers, and various other specialty applications. Our focus is on developing unique products for custom applications that
address specific customer needs, including enhanced functionality, high temperature, chemical and UV resistance, improved
environmental performance and improved processibility. Sales of our Specialty Chemicals products represented 49.2% of our
consolidated net sales for 2013, 46.3% for 2012, and 46.0% for 2011.
Markets and Customers
The Performance Materials product line is highly competitive based on quality, customer service, product performance, price,
field technical support and product innovations. Major paper and carpet customers include NewPage Holdings Inc., Verso Paper
Corp., Shaw Industries and Beaulieu. The specialties product line includes many product categories such as tire cord adhesives,
coating resins, elastomeric modifiers, antioxidants, oil/gas drilling and recovery, nonwovens for hygiene products and masking
tape. These applications are performance driven, where product innovation, technical service and application support are key
competitive differentiators. Major specialty chemical customers include Sherwin Williams, Halliburton, Schlumberger, Baker
Hughes, PPG, PGI, Hyosung, Shurtape, Xerox and Fitesa. On January 6, 2014, Verso Paper Corp. announced its intention to
acquire NewPage Holdings Inc. subject to regulatory approvals.
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 primarily competes with several large chemical companies including Styron, BASF, Lanxess, Lubrizol,
Wacker, Celanese, Dow, Arkema, Kumho, Hexion and several smaller regional companies such as Zeon, Rashig, Croslene and
Jubilant. Depending on the products involved and markets served, the basis of competition varies and may include price, quality,
customer and technical service, product performance, 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 categories,
including SB and SBA latex paper coatings and carpet backing binders in North America, nonwoven SB binders, SB vinyl pyridine
tire cord adhesives, floor care polymers and polymers used in the manufacturing of masking and other tapes. In addition, we also
retain strong, industry recognized brands in antioxidants, specialty coatings and elastomers.
3
Engineered Surfaces
Background
Our Engineered Surfaces segment began in 1945 when The General Tire & Rubber Company (later known as GenCorp)
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 three U.S. and two international
manufacturing sites, a distribution center in the U.S., technology centers and sales offices in the U.S. Europe and Asia, and a wide
range of engineered surfacing products.
During 2012, the Company sold substantially all of its commercial wallcovering operations which were comprised of its North
American and European wallcovering businesses. The results of operations and cash flows from these businesses have been
classified as discontinued operations for all periods presented.
Products
Our Engineered Surfaces segment develops, designs, produces and markets a broad line of engineered surfacing products,
including coated fabrics, vinyl, paper and specialty laminates and performance films. These products are used in numerous
applications, including commercial building refurbishment, remodeling and new construction, residential cabinets, flooring and
furnishings, retail display, office furniture, transportation markets including busses and mass transit, marine, automotive and
motorcycle OEM seating, recreational vehicles, manufactured housing, medical devices and products, and a variety of industrial
film applications. Our core competencies in innovative product development, design, compounding, calendering, casting, printing,
coating and embossing enable us to develop unique, aesthetically pleasing surfacing products that have strong 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, and product and process
development.
4
The following table shows the products that our Engineered Surfaces segment develops, designs, produces and markets.
Product Line
Coated Fabrics
% of Engineered
Surfaces Fiscal
2013 Net Sales
44%
Vinyl and urethane
coated fabrics
Primary Products
End-use Applications
Brand Names
Laminates and
Performance Films
56%
Vinyl, paper and
specialty laminates;
performance films
BOLTAFLEX,
BOLTASOFT,
NAUTOLEX, PREFIXX,
PREVAILL, PINNACLE
RADIANCE,
SURF(X), DESIGN4,
EFX, DURAMAX,
HARMONY,
VIEWNIQUE
Seating surfacing for
transportation, marine,
offices, hotels, hospital
and health care
facilities, stores, schools,
restaurants, public
buildings and
residences, decorative
and protective surfacing
for automotive soft top
covers, and industrial
applications
Decorative and
protective surfacing for
kitchen and bath
cabinets, manufactured
housing, recreational
vehicle interiors,
flooring, commercial
and residential furniture,
retail display and food
service fixtures, home
furnishings and
consumer appliances,
wall panel systems,
decorative wall
surfacing, performance
films for pool liners,
banners, tents, ceiling
tiles, decking and
medical products
Coated Fabrics. OMNOVA Solutions is a leading North American and Asian supplier of vinyl and urethane coated and
performance fabrics for transportation, marine, commercial, residential 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 residential
applications. A key differentiator is our PreFixx® protective coating, long recognized for delivering the industry’s best-in-class
performance, durability and easy maintenance to OMNOVA’s upholstery products. Sales of our coated fabrics products
represented 10.7% of our consolidated net sales for 2013, 10.4% for 2012 and 9.6% for 2011.
Laminates and Performance Films. OMNOVA Solutions is a leading North American supplier of vinyl, paper and specialty
laminates and performance films. Our laminates are used as alternatives to wood, paint, stone, stainless steel and high-pressure
laminates and thermally fused 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, wall surfacing, manufactured
housing and recreational vehicle interiors, flooring, commercial and residential furniture, retail display fixtures, home furnishings,
5
and consumer appliances. Performance films applications include awnings, tents, medical products, pool liners, movie screens,
decking, ceiling tile and shower pan liners.
A key strength of our laminates business is our coating technology, including ultraviolet, melamine, urethane, thermally cured
and others, which provides greater durability for high-wear applications. In addition, our laminates business has 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 13.4% of our consolidated net sales for 2013, 12.8% for 2012 and 11.2% for 2011.
Markets and Customers
We believe that our Engineered Surfaces segment is a leader in its targeted product categories. The coated fabrics, laminates
and performance films businesses are highly competitive based on functional performance, decorative content, price, quality,
customer service, global capability, brand name recognition, distribution networks and industry reputation. Engineered Surfaces
markets its products under numerous brand names to different industries. Certain of our better-known customers in this segment
include CGT, Armstrong, Tarkett, Ashley Furniture, Patrick Industries, Herculite, Masco and Masterbrand.
Marketing and Distribution
Our Engineered Surfaces segment distributes its products primarily through a direct sales force and agents to manufacturers of
cabinets, furniture, seating, health care and medical components, and other products. Many of our Engineered Surfaces 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 Engineered Surfaces segment competes with numerous companies, including international companies. Many of
these companies focus on only one product line and/or market and are smaller and privately-owned. Competitors include:
(cid:129) Coated Fabrics—Morbern, China General, Uniroyal and Spradling International
(cid:129) Laminates and Performance Films—Wilsonart, Toppan Printing, Renolit Corporation, LG Chemical America, PolyOne
Corporation and I2M
International Operations
Net sales from our foreign operations were $365.5 million in 2013, $383.1 million in 2012 and $417.9 million in 2011.
These net sales represented 35.9% of our total net sales in 2013, 34.0% in 2012 and 34.8% in 2011. Long-lived assets primarily
consist of net property, plant and equipment. Long-lived assets of our foreign operations totaled $116.4 million at November 30,
2013, $112.6 million at November 30, 2012 and $115.3 million at November 30, 2011. Our consolidated long-lived assets
totaled $224.3 million at November 30, 2013, $222.8 million at November 30, 2012 and $220.8 million at November 30,
2011.
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.
6
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 35 of this report,
which is incorporated herein by reference.
Employees
As of November 30, 2013, the Company employed approximately 2,300 employees at offices, plants and other facilities
located principally throughout
the
Company’s employees are covered by collective bargaining agreements in the United States. In addition, certain of our foreign
employees are also covered by collective bargaining agreements. During 2014, two labor contracts in the U.S. expire, covering
approximately 150 employees.
the United States, France, China, India and Thailand. Approximately 10.0% or 230 of
Raw Materials
Our Performance Chemicals segment utilizes a variety of raw materials, primarily monomers, in the manufacture of our
products. Most of these raw materials have been, and we expect will continue to be, generally available from multiple suppliers.
Monomer costs are a major component of the emulsion polymers produced by this segment. Key monomers include butadiene,
styrene, acrylates, acrylonitrile, vinyl acetate and vinyl pyridine (2VP). These monomers represented approximately 66% of
Performance Chemicals’ total raw materials purchased on a dollar basis in 2013 for this segment.
Our Engineered Surfaces 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 54% of Engineered Surfaces’ total raw materials purchased on a dollar basis in 2013 for this
segment.
The cost of these raw materials has a significant impact on our profitability. We generally attempt to respond to raw material
cost increases through productivity programs and, as needed, price increases to our customers. The success of attempted price
increases depends on a variety of factors including the specific market application and competitive environment. Under certain
circumstances, we are not able to pass along some or all of the increase. In addition, if accepted by customers, price increases
generally lag the increase in raw material costs. Index pricing applies to approximately 44% of Performance Chemicals sales (see
discussion on pages 21-22.
Research and Development
The OMNOVA Solutions technology centers in Akron, Ohio; Chester, South Carolina; Villejust, France; Valia,
India;
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 $10.0 million in 2013, $11.5 million in 2012 and $10.7 million in 2011. The
Company expects these costs to remain at current levels in the near future. 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
7
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 descriptions of our current business, operations, assets and other matters affecting the Company
as well as “forward-looking statements” as defined by federal securities laws. All forward-looking statements by the Company,
including verbal statements, are intended to qualify for the protections afforded forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Forward-looking statements reflect management’s current expectation, judgment, belief,
assumption, estimate or forecast about future events, circumstances or results and may address business conditions and prospects,
strategy, capital structure, debt and cash levels, sales, profits, earnings, markets, products, technology, operations, customers, raw
materials, claims and litigation, financial condition, and accounting policies among other matters. Words such as, but not limited
to, “will,” “may,” “should,” “projects,” “forecasts,” “seeks,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,”
“targets,” “optimistic,” “likely,” “would,” “could,” and similar expressions or phrases identify forward-looking statements.
All descriptions of our business, operations and assets, as well as all
involve risks and
uncertainties. Many risks and uncertainties are inherent in business generally and the markets in which the Company operates or
proposes to operate. Other risks and uncertainties are more specific to the Company’s businesses including businesses the
Company acquires. There may be risks and uncertainties not currently known to us. The occurrence of risks and uncertainties and
the impact of such occurrences is often not predictable or within the Company’s control. Such impacts could adversely effect the
Company’s business, operations or assets as well as 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.
forward-looking statements,
All written and verbal descriptions of our business, operations and assets and all forward-looking statements attributable to the
Company or any person acting on the Company’s behalf are expressly qualified in their entirety by the risks, uncertainties, and
cautionary statements contained herein.
All such descriptions and forward-looking statements speak only as of the date on which such description or statement is
made, and the Company undertakes no obligation, and specifically declines any obligation, other than that imposed by law, to
publicly update or revise any such descriptions or forward-looking statements whether as a result of additional information, future
events or otherwise.
Risks and uncertainties that may adversely impact our business, operations, assets, or other matters affecting the Company,
and which 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 internationally. A
significant or prolonged economic downturn, globally or regionally, could have the potential to adversely affect the demand for our
products and our results.
8
Raw material prices and availability have a significant impact on our profitability. If raw material price increases cannot be
passed on to our customers, or if 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 Engineered
Surfaces uses PVC, plasticizer and Ti02 extensively in its products. 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 higher raw material costs to our
customers in the form of price increases, historically there has been a time delay between higher raw material costs 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. If we are unable to pass along higher raw material costs to our customers, our results could be
adversely affected.
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 and these suppliers generally have
greater pricing and supply leverage. Various factors, including feedstock shortages, production disruptions, natural disasters, the
financial stability of our suppliers, supplier commitments to others, and internal raw material use by suppliers have reduced and
eliminated, and in the future may reduce or eliminate, the availability of certain raw materials. As a result, higher prices and
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.
Additionally, raw material price increases or supply uncertainty may result
products. If customers switch to substitute products, our results could be adversely affected.
in customers switching to substitutes for our
Certain markets we serve are highly competitive and 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. Certain markets we serve are highly competitive and
customers frequently seek price reductions. Customer consolidation in certain markets has created customers with greater
purchasing power. Additionally, the size of and consolidation among certain of our competitors means that some competitors have
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 develop, introduce, sell and support cost effective new products and technologies on a timely
basis and we make significant investments in research and development to do so. If we fail to develop and deploy new cost
effective products and technologies on a timely basis or our competitors develop superior products, 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 pay or timely pay amounts due to us, it could adversely
affect our results and cash flows.
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.
9
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,
which could adversely affect 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, but not limited to, the following:
(cid:129) fluctuations in currency exchange rates;
(cid:129) region to region fluctuations in key raw material costs;
(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) 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;
(cid:129) potentially adverse tax consequences; and
(cid:129) government expropriation of a business or assets.
Any of these events could adversely affect our international operations and our results.
Our business is subject to the risks associated with the use of chemicals.
We are subject to risks associated with chemical use including explosions, fires, leaks, discharges, inclement weather, natural
disasters, mechanical failure, unscheduled downtime, transportation interruption and acts of God. The occurrence of these risks
may result in operating disruptions at our facilities and could adversely affect our results.
We may be unable to achieve, or may be delayed in achieving, our goals under certain cost reduction measures, which
could adversely affect our results.
We have and are undertaking operational excellence processes using LEAN 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.
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
10
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 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 disrupt production and decrease market 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. In
many cases, we do not have redundant manufacturing or transportation capability and thus, any disruption of production or
transportation may result in loss of sales and customers. 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 regulations 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 our products could adversely affect our results.
Certain environmental requirements provide for strict and, under certain circumstances,
liability for
investigation and remediation of releases of regulated materials into the environment at or from properties owned or operated by
us or our predecessors or at or from properties where substances were sent for off-site treatment or disposal.
joint and several
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
increases in capital expenditures and
operating costs. Any increase in these costs, or unanticipated liabilities arising out of a release of regulated materials, discovery of
previously unknown conditions, more aggressive enforcement actions or new requirements, could adversely affect our results.
in significant
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, interest expense 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.
If we are unable to retain or hire key employees our business results may suffer.
Our success depends upon the continued contributions of our key employees. Global competition for skilled employees is
intense and our business success is dependent on our ability to retain our key employees as well as attract new key employees. If
we are unable to retain our existing key employees, or hire and retain new key employees our results could be adversely affected.
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 10.0% or about 230 of our employees that are located in the United States are covered by collective
bargaining agreements of which approximately 150 employees are covered by agreements that expire within the next 12 months.
In addition, certain employees of our foreign operations are also covered by collective bargaining agreements. There can be no
assurance that any of our collective bargaining agreements 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.
Our U.S. pension plan is underfunded, requiring significant 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 U.S.
pension plan in 2014 of $4.4 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.
12
Failure to protect intellectual property could adversely affect our results.
For certain products we rely on trademark, trade secret, patent and copyright laws to protect our intellectual property. We
cannot be sure that these intellectual property rights will be successfully asserted in the future or that they will not be invalidated or
circumvented. In addition, laws of some foreign countries in which our products are or may be sold do not protect our intellectual
property rights to the same extent as the laws of the United States. The failure or inability of 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 fact and
law, 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
intellectual property infringement or
the outcome, defending against allegations of
misappropriation can divert the time and attention of management. Any of the foregoing could have a negative effect on our
competitiveness and could adversely affect 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.
The ultimate resolution of such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, our estimates of
to change and actual results may materially differ from our estimates. In addition, if there is an
liability, if any, are subject
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 institution would fail. 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, which could adversely affect our results.
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; and
(cid:129) place us at a competitive disadvantage compared to our competitors that have less debt.
13
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 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 term
loan and our 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, 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 term loan and revolving credit facility restrict, but will not
completely prohibit, us from incurring substantial additional debt. In addition, the note indenture allows us to issue additional notes
under certain circumstances, which will also be guaranteed by our domestic subsidiaries. The note indenture also allows 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 does 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 imposes
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 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. There can be no assurance 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 are limitations on our ability to incur the full $100.0 million of commitments under our revolving credit facility.
Borrowings under our 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 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 revolving credit facility.
Moreover, our 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
revolving credit facility will not impose such actions during the term of our 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.
We are vulnerable to information system failures and attacks, which could harm our business.
We are heavily dependent on our information technology infrastructure, among other functions, to operate our factories, sell
our products, fulfill orders, manage inventory, and bill, collect and make payments. Our systems are vulnerable to damage or
interruption from natural disasters, power loss, telecommunication failures, computer viruses, computer denial-of-service attacks,
unauthorized intrusion and other events. Our business is also subject to break-ins, sabotage and intentional acts of vandalism.
Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our business,
which could adversely affect our results.
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
OMNOVA Solutions Global Technology Center
2990 Gilchrist Road
Akron, OH
Sales/Manufacturing/Technical/
Distribution:
Akron, OH
Calhoun, GA
Caojing, China
Chester, SC
Fitchburg, MA
Green Bay, WI
Le Havre, France
Mogadore, OH
*Mumbai, India
Ningbo, China
*Shanghai, China
Singapore
Valia, India
Villejust, France
Engineered Surfaces:
Headquarters:
*175 Ghent Rd
Fairlawn, OH
Manufacturing Facilities:
Auburn, PA
Jeannette, PA
Monroe, NC
*Rayong, Thailand
Shanghai, China
Sales/Marketing/Design/Distribution:
Akron, OH
*Asnieres, France
*Bangkok, Thailand
*Columbus, MS
*Rayong, Thailand
*Shanghai, China
*
An asterisk next to a facility listed above indicates that it is a leased property.
For a further discussion of our leased properties, please refer to Note P to the Consolidated Financial Statements of this report.
During 2013, we generally made effective use of our productive capacity. We believe that the quality and productive capacity
of our properties are sufficient to maintain our competitive position for the foreseeable future.
Item 3.
Legal Proceedings
From time to time, the Company is subject to various claims, 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 ultimate resolution of these matters will have a material
effect on the consolidated financial condition, results of operations or cash flows of the Company.
16
In August 2010,
the Company was sued by the insurer of Mafcote International claiming the Company’s Jeannette,
Pennsylvania plant had impeded the flow of water in an adjacent creek during an unusually severe storm resulting in water
damage to Mafcote’s plant. After trial in November 2012, Mafcote was initially awarded $3.4 million in damages. The Company’s
insurer has accepted coverage. The Company has a $0.5 million insurance deductible, of which approximately $0.4 million has
been paid through November 30, 2013. In December 2013, the Company’s insurer settled the matter with Mafcote for $2.8
million. Accordingly, as of November 30, 2013, the Company recognized a liability of $2.8 million and an insurance receivable
of $2.7 million.
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, 2013.
Item 4A.
Executive Officers of the Registrant
The following information is given as of January 21, 2014, and except as otherwise indicated, each individual has held the
same office during the preceding five-year period.
Kevin M. McMullen, age 53, 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 55, 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 57, Senior Vice President, Corporate 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.
Douglas E. Wenger, age 57, 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 65, Senior Vice President of the Company since 2011 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.
17
David H. Maynard, age 50, President, Engineered Surfaces since February 2012. Prior to his current role, Mr. Maynard
served most recently as General Manager, Laminates and Performance Films since 2009 and had served earlier in a variety of
finance, operations and business management positions of increasing responsibility within OMNOVA’s Engineered Surfaces
business segment. Mr. Maynard joined OMNOVA in 1991 as an Accounting Manager. Prior to joining OMNOVA, Mr. Maynard
served as Audit Manager with KPMG from 1986 to 1991.
Jay T. Austin, age 57, Vice President, Global Sourcing and Logistics of the Company since December 2010. Prior to that, he
had served as Vice President, Strategic Sourcing of 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.
Michael A. Quinn, age 50, Senior Vice President and Chief Human Resources Officer of OMNOVA Solutions Inc. since
October 2013. Prior to joining OMNOVA, Mr. Quinn spent 28 years in human resources positions with high technology,
manufacturing and service companies. Most recently, Mr. Quinn had served since January 2009 as Vice President, Human
Resources for the Specialty Diagnostics Group of Thermo Fisher Scientific, (the world leader in serving science through products
and services that help customers solve complex analytical challenges,
improve patient diagnostics and increase laboratory
for Thermo Fisher
productivity). Previously, Mr. Quinn had served as Vice President, Talent Management and Development
Scientific since June 2007. Before joining Thermo Fisher Scientific, Mr. Quinn spent four years as Director, Talent Acquisition and
Development for the Integrated Defense Systems business of Raytheon Company (a leading defense and aerospace company).
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, 2013, there were 7,033 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 85-86 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 N 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 87-88 and is incorporated herein by reference.
The following graph compares the cumulative 5-Year total return to shareholders on OMNOVA Solutions Inc.‘s common stock
versus the cumulative total returns of the S&P 500 index and the S&P Industrials index. The graph assumes that the value of the
in the company’s common stock and in each of the indexes (including reinvestment of dividends) was $100 on
investment
November 30, 2008 and tracks it through November 30, 2013.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among OMNOVA Solutions Inc., the S&P Index, and the S&P Industrials Index
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
11/08
11/09
11/10
11/11
11/12
11/13
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(1)
The following table sets forth the Company’s selected historical financial data which has been adjusted to reflect discontinued
operations for all periods presented. The selected historical financial data as of November 30, 2013, 2012, 2011, 2010, 2009
and for each of the five years in the period ended November 30, 2013 are derived from the Company’s audited consolidated
financial statements.
Statement of operations data:
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold (exclusive of depreciation)(2) . . . . . . . . . . . . . .
$1,018.1
805.4
$1,125.5
898.3
$1,201.1
982.5
$781.7
635.3
$625.3
490.6
2013
2012
2011
2010
2009
(Dollars in millions, except per share data)
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed asset impairment(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset sales(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance(5)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expense(6)
. . . . . . . . . . . . . . .
Debt issuance costs write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net(2)(7) . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . .
Income tax expense (benefit)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operations, net of tax:
(Loss) income from operations(9) . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . .
212.7
118.1
33.6
.2
(4.9)
7.1
31.9
—
1.5
(1.3)
227.2
121.2
32.0
1.0
—
1.0
36.5
—
—
(1.4)
218.6
108.6
33.5
3.1
1.2
1.6
38.0
2.3
1.0
(.8)
146.4
77.6
18.7
2.7
—
.5
8.7
5.5
—
(.6)
134.7
76.8
20.4
1.1
—
1.4
8.1
—
—
(1.5)
186.2
190.3
188.5
113.1
106.3
26.5
6.0
20.5
(.9)
—
(.9)
36.9
11.2
25.7
(4.1)
6.0
1.9
30.1
13.4
33.3
(83.9)
16.7
117.2
(19.5)
—
(19.5)
(9.3)
—
(9.3)
28.4
1.0
27.4
(1.2)
—
(1.2)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19.6
$
27.6
$
(2.8) $107.9
$ 26.2
Basic income (loss) per share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . .
$
$
.44
(.02)
$
.56
.05
.37
(.43)
$ 2.63
(.21)
$ .62
(.03)
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.42
$
.61
$
(.06) $ 2.42
$ .59
Diluted income (loss) per share:
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . .
$
$
.44
(.02)
$
.56
.04
.37
(.43)
$ 2.61
(.21)
$ .62
(.03)
Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.42
$
.60
$
(.06) $ 2.40
$ .59
General:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets
Long-term debt(10)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28.9
$ 854.7
$ 447.0
$ 164.9
$
32.8
$ 873.7
$ 442.6
$ 148.5
$
24.1
$ 865.1
$ 444.3
$ 103.1
$ 13.7
$727.0
$389.4
$324.3
$ 9.0
$338.0
$140.8
$ 31.2
(1) During November 2011, the Company committed to a plan to dispose of substantially all of its Engineered Surfaces commercial wallcovering operations. As such, the
results of operations for these businesses have been classified as discontinued operations for all periods presented.
(2) During 2010, the Company recognized strike-related costs of $2.4 million of which $1.4 million is recorded in cost of goods sold and $1.0 million is recorded in other
(income) expense.
20
(3) During 2013, the Company recognized intangible asset impairment charges of $0.2 million to write down the value of one of its trademarks to fair value. During 2012,
the Company recognized asset impairment charges of $1.0 million to write down the value of its Columbus, Mississippi facility and to write off other assets no longer
used (see Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discontinued Operations). During 2011, the Company recognized
asset impairment charges of $3.1 million due to the idling of a plant in Taicang, China and the planned realignment of coated fabrics production amongst existing
facilities. During 2010, the Company recorded asset impairment charges of $2.7 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 activities to other facilities.
(4) During 2013, gain on asset sales primarily relates to the sale of equipment and plants in Columbus, Mississippi and Taicang, China.
(5) Restructuring and severance consisted primarily of facility closure costs of $2.6 million and severance costs of $4.5 million in 2013, and severance costs of $1.0 million
in 2012, $1.6 million in 2011, $0.5 million in 2010 and $1.4 million in 2009.
(6) The Company recognized acquisition and integration costs of $2.3 million and $5.5 million in 2011 and 2010, respectively, related to the purchase of ELIOKEM
International SAS, which was acquired on December 9, 2010.
(7) 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.
(8) During 2010, the Company reversed a significant portion of its deferred tax valuation allowance of $98.2 million.
(9)
Includes long-lived asset impairment charges of $13.6 million and $3.5 million in 2011 and 2010, respectively.
(10) Included in 2013 is $3.0 million for a capital lease on land for the Company’s future corporate headquarters. 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.
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 engineered 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 Engineered Surfaces. The 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, nitrile butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, fluorochemicals
and bio-based chemistries. Performance Chemicals’ custom-formulated products include hollow plastic pigment, resins, binders,
adhesives, specialty rubbers, antioxidants and elastomeric modifiers which are used in paper and packaging, specialty coatings,
carpet, nonwovens, construction, oil/gas drilling and recovery, adhesives, tape, tires, floor care, textiles, graphic arts, polymer
stabilization, industrial rubbers & hoses, bio-based polymers and various other specialty applications. The Engineered Surfaces
segment develops, designs, produces and markets a broad line of functional and decorative surfacing products, including coated
fabrics, surface laminates and performance films. These products are used in numerous applications, including commercial building
refurbishment, 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 commercial appliances, 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.
The Company primarily sells its products directly to manufacturers.
The Company has strategically located manufacturing facilities in the United States, France, China, India 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 less profitable 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, its CEO, 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
21
Company’s Consolidated Financial Statements. For a reconciliation of the Company’s segment operating performance information,
please refer to Note R of the Company’s Consolidated Financial Statements.
A majority of the Company’s raw materials are derived from petrochemicals and chemical feedstocks whose prices are
cyclical and volatile. Generally, the Company attempts to pass along increased raw material prices to customers in the form of
price increases of its products, however, due to sales contracts with certain customers, there may be a time delay between
increased raw material prices and the Company’s ability to increase the prices of its products. Additionally, the Company may also
experience, from time to time, competitive price pressures and other factors which may not allow it to increase the prices of its
products.
OMNOVA’s Performance Chemicals segment had sales price index contracts related to approximately 44% of its sales in
2013 and 2012 and approximately 45% for 2011. Customers with sales price index contracts are primarily in the Performance
Materials product line. The index is generally comprised of a negotiated fixed amount per pound and the market price of key raw
materials (i.e., styrene and butadiene). The contract mechanisms generally allow for the pass-through of the changes, either
increases or decreases, in the prices of key raw materials within a 30 to 60 day period. Contracts vary in length from 12 to 36
months.
The remainder of Performance Chemicals’ sales are not indexed. OMNOVA periodically negotiates with each customer
regarding pricing changes based on the raw material components and the value-added and performance attributes of
OMNOVA’s product. OMNOVA’s pricing objective, which may or may not be met, is to recover raw material price increases
within a 30 to 60 day period.
Styrene, a key raw material component, is generally available worldwide, and OMNOVA has supply contracts with several
producers. OMNOVA believes there is adequate global capacity to serve demand. OMNOVA’s styrene purchases for 2010
through 2013 and an estimated range of market prices are as follows:
Pounds Purchased
(in millions)
Market Price Range
Per Pound
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172
177
205
180
$0.71 - $0.93
$0.57 - $0.78
$0.65 - $0.77
$0.54 - $0.68
Butadiene, a key raw material component, is generally available worldwide, but its price is volatile. OMNOVA has supply
times, when the demand of butadiene exceeds supply, it is sold on an allocated basis.
contracts with several producers. At
OMNOVA’s butadiene purchases for 2010 through 2013 and an estimated range of market prices are as follows:
Pounds Purchased
(in millions)
Market Price Range
Per Pound
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139
158
175
135
$0.44 - $1.01
$0.84 - $1.98
$0.86 - $1.77
$0.63 - $0.94
OMNOVA’s Engineered Surfaces segment does not utilize sales price index contracts with its customers; rather, it negotiates
pricing with each customer. OMNOVA’s pricing objective, which may or may not be met, is to recover raw material price
increases within a 90 day period. Key raw materials utilized by the Engineered Surfaces segment include polyvinyl chloride (PVC)
resins, textiles and plasticizers. These raw materials are generally readily available worldwide from multiple suppliers.
22
Key Indicators
Key economic measures relevant to the Company include global economic growth rates, discretionary spending for durable
goods, print advertising, oil and gas drilling levels, U.S. commercial real estate occupancy rates, U.S. office furniture sales,
manufactured housing shipments, housing starts and sales of existing homes and forecasts of raw material pricing for certain
petrochemical feed stocks. Key OEM industries which provide a general indication of demand drivers to the Company include
paper, commercial and residential construction and refurbishment, automotive and tire products, furniture manufacturing, flooring
manufacturing and ABS manufacturing. These measures provide general information on trends relevant to the demand for the
Company’s products but the trend information does not necessarily directly correlate with demand levels in the markets which
ultimately use the Company’s products.
Key operating measures utilized by the business segments include orders, sales and pricing, 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 and pricing; gross profit; selling, general and administrative
expenses; adjusted operating profit; adjusted net income; and consolidated earnings before interest, taxes, depreciation and
amortization (“EBITDA”) as set forth in the Net Leverage Ratio in the Company’s $200,000,000 Term Loan Credit Agreement,
working capital, operating cash flows, capital expenditures, cash interest expense 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 2013 Compared to 2012
The Company’s net sales in 2013 were $1,018.1 million compared to $1,125.5 million in 2012. The Performance Chemicals
business segment revenue decreased by 10.6% and the Engineered Surfaces business segment revenue decreased 6.1%.
Contributing to the net sales decrease in 2013 were reduced volumes of $50.5 million, or 4.5%, and reduced pricing of
$58.3 million, partially offset by favorable currency exchange translation effects of $1.4 million. Lower pricing in Performance
Chemicals, which was due to lower year-over-year raw material costs, was partially offset by improved pricing in Engineered
Surfaces.
Gross profit in 2013 was $212.7 million with a gross profit margin of 20.9% compared to gross profit of $227.2 million and
a gross profit margin of 20.2% in 2012. The increase in gross profit margin was primarily due to better sales mix and cost
reduction actions.
Selling, general and administrative expense in 2013 decreased $3.1 million, to $118.1 million, or 11.6% of sales, compared
to $121.2 million, or 10.8% of net sales in 2012. The decrease in 2013 was primarily due to lower employee headcount and
reduced annual incentive compensation expense.
Interest expense was $31.9 million and $36.5 million for 2013 and 2012, respectively. The decrease is primarily due to lower
borrowing spreads as a result of a March 2013 refinancing and lower foreign borrowings. Also, included in interest expense for
2012 is approximately $1.3 million related to an expired interest rate swap.
Income tax expense was $6.0 million in 2013, a 22.6% effective income tax rate, compared to income tax expense of
$11.2 million, or a 30.3% effective tax rate in 2012. The lower rate in 2013 was primarily due to income in foreign jurisdictions
where the rate is lower than the U.S. domestic federal statutory rate, one-time tax benefits relating to operations that were sold,
other discrete foreign tax items and a U.S. item, all of which totaled $2.4 million. Cash tax payments in the U.S. are expected to be
federal net operating loss carryforwards,
minimal
$108.9 million of state and local net operating loss carryforwards, $0.4 million of
foreign tax credit carryforwards and
$0.2 million of AMT credit carryforwards. The majority of the federal, state and local net operating loss carryforwards expire
between 2022 and 2032.
few years as the Company has $113.6 million of U.S.
for the next
23
The Company has not provided for U.S. income taxes on certain of its non-U.S. subsidiaries’ undistributed earnings as such
amounts are considered permanently reinvested outside the U.S. To the extent
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, 2013,
the non-U.S. subsidiaries have a cumulative unremitted foreign earnings income position of $62.5 million.
that
The Company generated income from continuing operations of $20.5 million or $0.44 per diluted share in 2013 compared to
$25.7 million or $0.56 per diluted share in 2012. Included in 2013 are gains on asset sales of $4.9 million primarily due to the
sale of the Company’s Taicang, China facility and Columbus, Mississippi property, plant and equipment, and a write-off of
deferred financing fees of $1.5 million as a result of refinancing actions and an impairment charge of $0.9 million on a note
receivable. Included in 2012 are asset impairment charges of $1.0 million relating to equipment at the Columbus, Mississippi and
Taicang, China facilities.
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, the CEO, 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. The Company’s commercial wallcovering businesses, which have historically been included in the
Engineered Surfaces segment, have been reclassified to discontinued operations due to actions taken by the Company to sell those
businesses and, as such, the following discussion does not include results of operations for the commercial wallcovering businesses.
Year Ended
November 30,
2013
2012
(Dollars in millions)
Segment Sales:
Performance Chemicals
Performance Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 272.2
500.8
$ 343.2
521.3
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 773.0
$ 864.5
Engineered Surfaces
Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 108.9
136.2
$ 117.0
144.0
Total Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245.1
261.0
Consolidated Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,018.1
$1,125.5
Segment Gross Profit:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 155.4
57.3
$ 177.2
50.0
Consolidated Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 212.7
$ 227.2
Segment Operating Profit:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees write-off
$
$
64.1
15.6
(31.9)
(19.8)
(1.5)
89.6
3.8
(36.5)
(20.0)
—
Consolidated income from continuing operations before income tax . . . . . . . . . . . . . . . . . . . . .
$
26.5
$
36.9
24
Performance Chemicals
Performance Chemicals’ net sales decreased $91.5 million to $773.0 million during 2013 compared to $864.5 million during
2012. The decrease was primarily due to reduced customer pricing of $61.1 million, or 7.1%, as a result of lower raw material
costs and their impact on index pricing as well as competitive pricing pressure in Performance Materials product
lines. Also
impacting net sales were reduced volumes of $29.8 million, or 3.4%, and unfavorable foreign currency translation effects of
$0.6 million. Net sales for the Performance Materials product
line decreased $71.0 million to $272.2 million during 2013
compared to $343.2 million during 2012 driven by lower volumes in both paper and chemical markets of $41.3 million and
reduced pricing of $29.7 million. Net sales for the Specialty Chemicals product line decreased $20.5 million to $500.8 million
during 2013 compared to $521.3 million during 2012 due to reduced customer pricing of $31.4 million and unfavorable foreign
currency translation, partially offset by improved volumes of $11.5 million as sales increased in oilfield solutions, coatings,
nonwovens and antioxidants.
Performance Chemicals’ gross profit was $155.4 million with a gross profit margin of 20.1% in 2013 compared to
$177.2 million with a gross profit margin of 20.5% in 2012. Better sales mix and lower raw material costs were offset by reduced
pricing and decreased volumes. Raw material costs decreased $40.6 million during 2013.
This segment generated an operating profit of $64.1 million in 2013 compared to $89.6 million in 2012. The decrease in
segment operating profit was primarily due to lower customer pricing and the incremental margin impact of the lower sales volume
in Performance Materials, partially offset by lower raw material costs and cost reduction actions. The segment operating profit also
includes items which management excludes when evaluating the results of the Company’s segments. Those items for 2013 include
$2.1 million of severance costs, $1.0 million of accelerated depreciation expense related to assets for which production will be
transferred to another Performance Chemicals facility, a non-cash intangible asset impairment charge of $0.2 million and a gain of
$0.3 million on an asset sale. In July, 2013, the Company announced a plan to transfer the manufacture of styrene acrylics and
other latices from its Akron, Ohio facility to its Mogadore, Ohio facility in an effort to consolidate, upgrade and improve this
process. As a result, certain styrene butadiene (SB) latex capacity at
the Mogadore, Ohio facility will be re-purposed to the
production of styrene acrylic and other specialty emulsion polymer chemistries. This project is expected to be completed near the
end of 2014 and will require an estimated $11.0 million in capital investments while generating expected annual savings of
$4.0 million after completion.
Engineered Surfaces
Engineered Surfaces’ net sales decreased $15.9 million, or 6.1%, to $245.1 million in 2013 from $261.0 million in 2012
primarily due to lower volumes of $20.7 million, or 7.9%, which was partially offset by positive pricing actions of $2.8 million, or
1.1%, and favorable foreign currency translation effects of $2.0 million. Coated Fabrics net sales decreased to $108.9 million in
2013, compared to $117.0 million in 2012 due to the lower sales volumes. Net sales for the Laminates and Performance Films
product lines decreased to $136.2 million during 2013, compared to $144.0 million million during 2012, as sales were lower
across most markets.
Engineered Surfaces’ gross profit was $57.3 million with a gross profit margin of 23.4% during 2013, compared to
$50.0 million and a gross profit margin of 19.2% in 2012. The improvement in 2013 was primarily due to positive pricing actions,
lower raw material costs and improved product mix.
Segment operating profit was $15.6 million for 2013 compared to $3.8 million for 2012. The improvement was primarily due
to better sales mix, lower raw material costs, positive pricing actions and cost reduction actions. Segment operating profit also
includes items which management excludes when evaluating the results of the Company’s segments. Those items for 2013 include
gains on asset sales of $5.1 million, workforce reduction and other costs of $3.0 million, and facility closure and transition costs of
$3.3 million and a non-cash impairment charge of $0.9 million on a note receivable. Those items for 2012 include facility closure
and transition costs of $4.0 million, workforce reduction costs of $1.0 million, non-cash asset impairment charges of $1.0 million
and net charges relating to a non-product claim against the Company of $0.5 million (see Item 3 Legal Proceedings).
25
Interest and Corporate
Interest expense was $31.9 million and $36.5 million for 2013 and 2012, respectively. The decrease is primarily due to lower
borrowing spreads as a result of a March 2013 refinancing and lower foreign borrowings. Also, included in interest expense for
2012 is approximately $1.3 million related to an expired interest rate swap.
Corporate expenses were $19.8 million in 2013 compared to $20.0 million in 2012.
Results of Operations of 2012 Compared to 2011
The Company’s net sales in 2012 were $1,125.5 million compared to $1,201.1 million in 2011. The Performance Chemicals
business segment revenue decreased by 9.2% while the Engineered Surfaces business segment revenue increased 4.7%.
Contributing to the net sales decrease in 2012 were reduced volumes of $60.4 million, or 5.0%, and unfavorable currency
exchange translation effects of $16.0 million, or 1.3%, partially offset by pricing improvements of $0.8 million. Lower pricing in
Performance Chemicals, which was due to lower year-over-year raw material costs as well as reduced volumes for that segment,
were offset by improved pricing and volumes in Engineered Surfaces.
Gross profit in 2012 was $227.2 million with a gross profit margin of 20.2% compared to gross profit of $218.6 million and
a gross profit margin of 18.2% in 2011. The increase in gross profit margin was primarily due to better sales mix and lower raw
material costs, which were partially offset by a decline in selling prices during the second half of 2012.
Selling, general and administrative expense in 2012 increased $12.6 million, to $121.2 million, or 10.8% of sales, compared
to $108.6 million, or 9.0% of net sales in 2011. The increase in 2012 was primarily due to increased staffing and employment
costs, higher expenditures related to information technology system enhancements and research and development.
Other income was $1.4 million in 2012 compared to income of $0.8 million in 2011.
Interest expense was $36.5 million for 2012, compared to $38.0 million in 2011. Included in interest expense for 2012 and
2011 is approximately $1.3 million and $2.6 million, respectively, related to an interest rate swap that was settled in the fourth
quarter of 2010. The interest rate swap settlement was being amortized over the original term of the swap which expired in May
2012.
The Company recorded income tax expense of $11.2 million, or a 30.3% effective income tax rate for 2012, compared to
income tax expense of $13.4 million, or a 44.5% effective tax rate in 2011. The lower rate in 2012 was primarily due to income in
foreign jurisdictions where the rate is lower than the U.S. domestic federal statutory rate. The higher rate in 2011 was primarily
due to losses in jurisdictions where no offsetting tax benefit is recorded due to a valuation allowance position and one-time tax
costs associated with the ELIOKEM acquisition. Cash tax payments in the U.S. are expected to be minimal for the next few years as
the Company had $116.8 million of U.S. federal net operating loss carryforwards, $90.0 million of state and local net operating
loss carryforwards, $0.6 million of foreign tax credit carryforwards and $0.2 million of AMT credit carryforwards. The majority of
the federal, state and local net operating loss carryforwards expire between 2022 and 2032.
The Company generated income from continuing operations of $25.7 million or $0.56 per diluted share in 2012 and
$16.7 million or $0.37 per diluted share in 2011. The Company reported net income of $27.6 million or $0.60 per diluted share
in 2012 compared to net loss of $2.8 million or $0.06 per diluted share in 2011.
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, the CEO, in
evaluating performance and allocating resources.
26
The following table reconciles segment sales to consolidated net sales and segment operating profit (loss) to consolidated
income before income taxes. The Company’s commercial wallcovering businesses, which have historically been included in the
Engineered Surfaces segment have been reclassified to discontinued operations due to the sale of those businesses and, as such,
the following discussion does not include results of operations for the commercial wallcovering businesses.
Year Ended
November 30,
2012
2011
(Dollars in millions)
Segment Sales:
Performance Chemicals
Performance Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 343.2
521.3
$ 399.3
552.6
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 864.5
$ 951.9
Engineered Surfaces
Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 117.0
144.0
$ 114.3
134.9
Total Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261.0
249.2
Consolidated Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,125.5
$1,201.1
Segment Gross Profit:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 177.2
50.0
$ 175.2
43.4
Consolidated Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 227.2
$ 218.6
Segment Operating Profit (Loss):
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees write-off
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
89.6
3.8
(36.5)
(20.0)
—
—
86.5
(1.3)
(38.0)
(13.8)
(1.0)
(2.3)
Consolidated income from continuing operations before income tax . . . . . . . . . . . . . . . . . . . . .
$
36.9
$
30.1
Performance Chemicals
Performance Chemicals’ net sales decreased $87.4 million to $864.5 million during 2012 compared to $951.9 million during
2011. The decrease was primarily due to reduced volumes of $66.1 million, or 6.9%, lower customer pricing of $4.4 million, or
0.5%, as raw material costs decreased and unfavorable foreign currency translation effects of $16.9 million. Net sales for the
Performance Materials product line decreased $56.1 million to $343.2 million during 2012 compared to $399.3 million during
2011 driven by lower volumes in both markets and lower pricing. Net sales for the Specialty Chemicals product line decreased
$31.3 million to $521.3 million during 2012 compared to $552.6 million during 2011 driven by a decline in volumes and
unfavorable foreign currency translation, partially offset by increased sales in oil and gas drilling chemicals and tape adhesives
and improved pricing.
Performance Chemicals’ gross profit was $177.2 million with a gross profit margin of 20.5% in 2012 compared to
$175.2 million with a gross profit margin of 18.4% in 2011. The improvement in gross profit margin in 2012 was primarily due to
better sales mix and lower raw material costs, which were partially offset by lower pricing and decreased volumes. Raw material
costs decreased $20.6 million during 2012.
27
This segment generated an operating profit of $89.6 million in 2012 compared to $86.5 million in 2011. The increase in
segment operating profit was primarily due to lower raw material costs, partially offset by lower volumes and lower pricing. The
segment operating profit also includes items which management excludes when evaluating the results of the Company’s segments.
Those items for 2011 include $2.7 million due to a one-time fair value adjustment for ELIOKEM inventory, a trade receivable
allowance charge of $0.9 million and workforce reduction costs for ELIOKEM of $1.1 million.
Engineered Surfaces
Engineered Surfaces’ net sales increased $11.8 million, or 4.7%, to $261.0 million in 2012 from $249.2 million in 2011
primarily due to increased volumes of $5.7 million, or 2.3%, positive pricing actions of $5.2 million, or 2.1%, and favorable
foreign currency translation effects of $0.9 million. Coated Fabrics net sales increased to $117.0 million in 2012, compared to
$114.3 million in 2011 as sales improved in the contract upholstery, transportation and marine markets. Net sales for the
Laminates and Performance Films product lines improved to $144.0 million during 2012, compared to $134.9 million million
during 2011. Laminates product line sales increased $15.3 million as sales improved in most markets while the Performance Films
product line sales declined $6.2 million on weakness in pool liner, medical and films applications.
Engineered Surfaces’ gross profit was $50.0 million with a gross profit margin of 19.2% during 2012, compared to $43.4
million and a gross profit margin of 17.4% in 2011. The improvement in 2012 was primarily due to increased volumes and
positive pricing actions.
Segment operating profit was $3.8 million for 2012 compared to a loss of $1.3 million for 2011. The improvement was
primarily due to positive pricing actions, higher volumes and lower raw material costs, partially offset by higher manufacturing and
selling expenses. Segment operating profit also includes items which management excludes when evaluating the results of the
Company’s segments. Those items for 2012 include workforce reduction costs of $1.0 million, non-cash asset impairment charges
of $1.0 million and net charges relating to a non-product claim against
the Company of $0.5 million (see Item 3 Legal
Proceedings). Those items for 2011 include asset impairment charges of $3.1 million, workforce reduction costs of $0.5 million,
plant closure costs of $0.5 million, a tax indemnification charge of $0.2 million and a pension curtailment charge of $0.1 million.
Excluding these items, operating profit improved to $6.3 million in 2012 as compared to $3.1 million in 2011.
In November 2011, the Company committed to a plan to exit its North American wallcovering business and move production
of its Columbus, Mississippi coated fabrics business to other facilities and, accordingly, recognized an impairment charge on
machinery and equipment of $0.7 million. The impairment was caused by the transfer of certain products to other Company
facilities to better meet customer demand. In the fourth quarter of 2012, the Company recognized an additional impairment charge
of $0.8 million relating to the Columbus, Mississippi facility as a result of weaker real estate market values. The assets were written
down to their estimated fair value using a cost approach.
Interest and Corporate
Interest expense was $36.5 million and $38.0 million for 2012 and 2011, respectively. The decrease of $1.5 million is due to
the completed amortization of an interest rate swap agreement in the second quarter of 2012 and slightly lower pricing for the
Term Loan.
Corporate expenses were $20.0 million in 2012 compared to $13.8 million in 2011. The increase is primarily due to
increased staffing and and employment costs, information technology system enhancements and outside services.
Discontinued Operations
As part of the Company’s strategy to focus on businesses with greater global growth potential, the Company decided in the
fourth quarter of 2011 to exit the commercial wallcovering business.
On December 12, 2011, the Company completed the sale of its North American wallcovering business to J. Josephson, Inc., a
private commercial wallcovering producer based in New Jersey. The sale included print cylinders, certain equipment, trademarks,
28
contracts and other assets associated with the Company’s domestically-produced wallcovering. Under terms of the sale, the
Company received $10.0 million in cash and may receive up to three years of royalty payments based on future sales of
OMNOVA commercial wallcovering patterns. The Company retained the net working capital,
the Columbus, Mississippi
manufacturing facility and certain production assets which were also used by its other businesses.
The Company recognized a net after-tax gain of approximately $6.0 million ($9.9 million before tax) from the sale transaction
during the first quarter of 2012, which represents the excess of the sale price over the book value of the assets sold.
During 2012 and the first quarter of 2013, the Company continued to manufacture commercial wallcovering products for J.
Josephson as part of an orderly transition of production from the Company’s Columbus, Mississippi plant to J. Josephson’s plant in
New Jersey. The Company completed the transition of production by January 31, 2013. The net cash flows received and paid by
the Company relating to the manufacture of commercial wallcovering for J. Josephson during 2013 were not significant.
For the North American wallcovering business, the Company allocated the book value of certain shared manufacturing assets,
as well as the associated shared manufacturing and selling costs between the wallcovering products and the coated fabrics
products based on the relative shares of manufacturing volume produced in the Columbus, Mississippi facility. The Company
transferred the production of certain coated fabrics products to other company facilities. The transfer was completed during the first
quarter of 2013.
On March 6, 2012, the Company sold its U.K.-based Muraspec commercial wallcovering business to affiliates of a2e Venture
Catalysts Limited and its principal Amin Amiri for $2.4 million in cash and a note receivable for $3.8 million. The note receivable
is secured by a first lien on a building owned by the sold business. The Company recognized losses of $0.9 million related to this
transaction during 2012 to reflect the fair value of the assets and liabilities sold to the buyer.
Net sales of the discontinued businesses were $2.1 million, $35.9 million and $70.2 million for 2013, 2012 and 2011,
respectively. Losses before income taxes for the discontinued businesses were $1.5 million, $5.0 million and $23.3 million for
2013, 2012 and 2011, respectively. The loss from discontinued operations in 2013 includes legal costs of $1.3 million related to a
dispute with a former wallcovering customer (see Note P—Contingencies and Commitments). In 2011, the loss from discontinued
operations includes long-lived asset impairment charges of $13.6 million and inventory write-downs of $2.9 million.
Financial Resources and Capital Spending
The following table reflects key cash flow measures from continuing operations:
2013
2012
2011
(Dollars in millions)
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.8
$ 15.7
$ 65.3
$(22.0) $(20.1) $(42.1)
$ (1.5) $ (2.9) $ 39.3
$ 27.7
$ 44.1
$ 21.9
Cash provided by operating activities was $45.8 million in 2013 compared to $65.3 million in 2012 and $15.7 million in
2011. The decrease in 2013 was primarily due to an increase in working capital and contributions to the Company’s U.S. defined
benefit plan. The increase in 2012 is primarily due to improvements in net income and in working capital, partially offset by higher
contributions to the Company’s U.S. defined benefit pension plan. Days sales outstanding was 47.8 days in 2013, 45.8 days in
2012 and 47.9 days in 2011. The increase in 2013 is primarily due to an increase in terms at several key customers and a higher
mix of receivables in foreign countries where terms are longer. The improvement in days sales outstanding in 2012 was primarily
due to improved collection efforts.
Cash used in investing activities was $22.0 million in 2013, compared to $20.1 million in 2012 and $42.1 million in 2011.
Included in 2013 are capital expenditures of $28.9 million which were partially offset by proceeds from the sale of assets of
$6.7 million primarily related to sale of the Taicang, China facility and Columbus, Mississippi equipment. Included in 2012 are
29
capital expenditures of $32.8 million partially offset by cash received from the sale of the Company’s wallcovering businesses.
Included in 2011 is the cash paid for the ELIOKEM acquisition of $301.7 million, less cash acquired in the businesses of
$30.1 million. Also included in 2011 was the use of $253.2 million of restricted cash to complete the ELIOKEM acquisition and
refinancing of OMNOVA’s existing debt on December 9, 2010 and $24.1 million of capital expenditures. Capital expenditures
were made and are planned principally for asset replacement, new product capability, cost reduction, safety and productivity
improvements and environmental protection. The Company expects capital expenditures to be approximately $50.0 million during
2014. The expected increase in capital expenditures over 2013 is primarily due to expansion of acrylics manufacturing capability
at the Company’s Mogadore, Ohio plant and construction of the Company’s future new corporate headquarters building. The
Company plans to fund substantially all of its capital expenditures from cash flow generated from operations.
Cash used for financing activities was $1.5 million in 2013, due primarily to debt payments of $6.5 million and refinancing
costs of $0.6 million, partially offset by the release of restricted cash which was previously used as a compensating balance against
foreign debt. Cash used in financing activities in 2012 was $2.9 million primarily due to debt payments of $3.6 million, partially
offset by cash received from the exercise of the Company’s employee stock options of $2.0 million. Cash provided by financing
activities in 2011 of $39.3 million was due primarily to the refinancing activities and the increase of the existing term loan from
$140.9 million to $200.0 million. Total debt was $446.6 million as of November 30, 2013, which includes outstanding senior
notes of $250.0 million, $194.0 million for the term loan and $2.6 million of foreign debt, compared to $453.6 million as of
November 30, 2012. OMNOVA’s cash balance of $164.9 million at November 30, 2013 consists of $101.8 million in the U.S.,
$36.4 million in Europe and $26.7 million in Asia. OMNOVA is not aware of any restrictions regarding the repatriation of its
non-U.S. cash.
The Company believes that its cash flows from operations, together with existing credit facilities and cash on hand will be
adequate to fund its requirements for at least the next twelve months.
Debt—Information regarding the Company’s debt is disclosed in Note N to the Company’s consolidated financial statements.
Contractual Obligations
Long-term debt and amounts due banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments on long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating and financing leases(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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)
$ 4.6
—
27.9
5.7
1.0
5.9
—
$ 4.0
—
56.1
10.4
—
23.5
3.0
$440.0
.4
49.3
8.2
—
18.9
3.0
Total
$448.6
4.0
133.3
65.1
1.0
59.5
9.1
More
Than 5
Years
$ —
3.6
—
40.8
—
11.2
3.1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$720.6
$45.1
$97.0
$519.8
$58.7
(1) Based on outstanding debt balances as of November 30, 2013 and estimated interest rates. As those are based on estimates, actual
future payments may be different.
(2) Includes payments on the Company’s future corporate headquarters.
(3) Payments are based on Company estimates and current funding laws. Actual results may be different.
Significant Accounting Estimates 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, 2013, 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
30
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities as of the date of the financial statements. Periodically, the Company reviews its estimates and judgments
including those related to product returns, accounts receivable, inventories, litigation, environmental reserves, pensions and income
taxes. The Company bases its estimates and judgments on historical experience and on various assumptions that it believes to be
reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or
conditions.
Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the
preparation of its consolidated financial statements:
A) Revenue Recognition
The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2)
delivery has occurred; 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. Delivery is considered to have occurred when the customer assumes
the risk and rewards of ownership. The Company estimates and records provisions for quantity rebates and sales returns and
allowances as an offset to revenue in the same period the related revenue is recognized, based upon its experience. These items
are included as a reduction in deriving net sales.
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 $2.0 million and $2.2 million at
November 30, 2013 and 2012, 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 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 material
preferences 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 Engineered Surfaces segment, was $8.2
million at November 30, 2013 and $10.7 million at November 30, 2012.
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
material 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. As of May 2007, the Company’s U.S. defined benefits pension plan has
been closed to all new hires and since December 1, 2011, future service benefits have been frozen for all participants.
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 $4.3 million in 2013 and $4.1 million in 2012. Pension expense is calculated
using the discount rate to discount plan liabilities at the prior year measurement date. Discount rates of 4.10% and 5.52% were
used to calculate the pension expense in 2013 and 2012, respectively. The Company anticipates 2014 expense to be
approximately $3.8 million based on a discount rate of 4.74%. An increase or decrease of 25 basis points in the discount rate
would decrease or increase expense on an annual basis by less than $0.1 million. Cash contributions to the pension plans were
$8.8 million in 2013 and $18.4 million in 2012. The higher contributions in 2012 are due to a voluntary contribution made by the
Company to its U.S. defined benefit plan and higher required funding resulting from the Pension Protection Act of 2006. Future
pension benefits for U.S. plan members are frozen and fully vested. Therefore, there is no future service benefit accrual for the
Company’s U.S. defined benefit plans.
The Company determined the discount rate used to discount the plan liabilities at the plan’s measurement date, which was
November 30, 2013. 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 a yield derived from matching projected pension payments with maturities of a
portfolio of available non-callable bonds 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 defined
benefit pension plan obligations as of November 30, 2013 should be 4.74% compared to 4.14% in 2012. A 25 basis point
change in the discount rate would increase or decrease the projected benefit obligation by approximately $8.0 million.
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 7.75% for plan years 2013 and 2012. The measurement dates of
November 30, 2013 and 2012 were used to determine these rates. A 25 basis point change in the assumed rate of return for
assets 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 and discount rate assumptions and the Company’s prior
years credit balance carryforwards, the Company anticipates it will be required under the Pension Protection Act of 2006
(“PPA-2006”), to make a cash contribution to its U.S. pension plan of $4.4 million in 2014. The Company, under rules of the PPA-
2006, has elected the fifteen year amortization schedule for the period beginning with the 2009 plan year. Total global pension
plan contributions for 2014 are expected to be $5.1 million.
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 7.75% return assumption for 2014;
(cid:129) Significant changes in interest rates, affecting the discount rate; and
(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
32
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, 2013, the Company had approximately $83.9 million of net deferred tax assets primarily related to
federal and state domestic loss carryforwards and $51.9 million of net deferred tax liabilities primarily related to intangible assets
and fixed asset depreciation differences.
For the year ended November 30, 2013, the Company considered the positive and negative evidence as required by
ASC 740, “Income Taxes,” 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,
predictability of future taxable income and taxable income from the reversal of deferred tax assets and liabilities in future years.
to incur significant cash
However, because of Net Operating Loss Carryforwards (“NOLCs”), the Company does not expect
payments for U.S. taxes over the next several years.
The Company has not provided deferred tax liabilities on certain of its non-U.S. subsidiaries’ undistributed earnings as these
undistributed earnings are treated by the Company as being permanently reinvested. To the extent that foreign earnings previously
treated as permanently reinvested were to be 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.
Determination of the amount of unrecognized deferred tax liabilities and related foreign withholding taxes are not practicable due
to the complexities associated with this hypothetical calculation and the Company’s permanent reinvestment policy. As of
November 30, 2013, the non-U.S. subsidiaries have a cumulative unremitted foreign earnings income position of $62.5 million for
which no deferred tax liability has 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 expense. For the year 2013, the Company recognized an income tax expense related to interest and penalties
of $0.4 million.
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 Q 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 stated at historical cost
less
accumulated depreciation.
Construction in process is not depreciated until the asset is placed in service. Refurbishment costs that extend the useful life of
the asset are capitalized, whereas ordinary maintenance and repair costs are expensed as incurred. Interest expense incurred
during the construction phase is capitalized as part of construction in process until the relevant projects are completed and placed
into service.
33
Long-lived assets 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.
I) Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a
business combination. Goodwill and other indefinite lived intangible assets are tested for impairment at
least annually as of
September 1 and whenever events or circumstances indicate that the carrying amount may not be recoverable. The Company
performs the impairment analysis at the reporting unit level using a two-step impairment test. The first step identifies potential
impairments by comparing the estimated fair value of a reporting unit with its carrying value. Fair value is typically estimated using
a market approach method or a discounted cash flow analysis, which requires the Company to estimate future cash flows
anticipated to be generated by the reporting unit as well as a discount rate to measure the present value of the anticipated cash
flows. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the second
step is not necessary. If the carrying value of a reporting unit exceeds the estimated fair value, the second step calculates the
possible impairment by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of goodwill is
less than the carrying value, an impairment charge is recognized.
The impairment test for indefinite lived intangible assets consists of comparing the fair value of the asset with its carrying value.
The Company estimates the fair value of its indefinite lived intangible assets using a fair value model based on a market approach
method or discounted future cash flows. If the carrying amounts exceed the estimated fair value, an impairment loss would be
recognized in the amount of the excess. During the fourth quarter of 2013, the Company performed its annual impairment test for
indefinite lived intangible assets and determined that the expected future discounted cash flows of one of its Performance Chemicals
segments’ trademarks was lower than its book value by $0.2 million as a result of lower selling prices, and accordingly, recognized
an impairment charge of $0.2 million. Key inputs used in determining the fair value of this trademark were expected future revenues
and royalty rates. A 1% decrease in the royalty rate would impact the fair value of this trademark by approximately $2.0 million. A
5% decrease in estimated future revenues would impact the fair value of this trademark by approximately $0.3 million.
Estimating future cash flows requires significant
including sales, operating
margins, royalty rates, discount rates and future economic conditions. To the extent that the reporting unit is unable to achieve
these assumptions, impairment losses may occur.
judgments and assumptions by management
Finite-lived 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
lives with periods ranging from 3 to 30 years. Accumulated amortization of finite lived intangible assets at November 30, 2013
and 2012 was $39.0 million and $32.8 million, respectively.
J)
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 the balance sheet date, while revenues and expenses are translated at the weighted average exchange
rates each month during the year. The resulting translation gains and losses on assets and liabilities are recorded in Accumulated
Other Comprehensive Income (Loss), and are excluded from net income until realized through sale or liquidation of the investment.
K)
Leasing Arrangements
Operating 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.
34
Capital leases—Capital leases are recorded at the lower of fair market value or the present value of future minimum lease
payments with a corresponding amount recorded in property, plant and equipment. Current portions of capital lease payments are
included in Amounts due banks and non-current capital
lease obligations are included in Long-term debt in our Consolidated
Balance Sheets.
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, 2013 reflects reserves for environmental remediation efforts of
$0.6 million.
Capital expenditures for projects related to environmental matters were $0.7 million in 2013, $1.1 million in 2012 and
$1.5 million in 2011. During 2013, non-capital expenditures for environmental compliance and protection totaled $7.8 million, all
of which were for recurring costs associated with managing hazardous substances and pollution abatement in ongoing operations.
Similar non-capital expenditures were $9.4 million and $8.2 million in years 2012 and 2011, respectively. The Company
anticipates that non-capital environmental expenditures for the next several years will be consistent with 2013 expenditure levels.
New Accounting Pronouncements—New accounting pronouncements impacting the Company are disclosed in Note A to
the Company’s consolidated financial statements.
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 N to the Consolidated Financial Statements, the Company’s Term Loan Facility and non-domestic borrowings bear interest at
various rates. Borrowings under the Term Loan and the Facility were $194.0 million as of November 30, 2013. Non-domestic
borrowings with banks were $2.6 million as of November 30, 2013. The weighted average effective interest rate of the Company’s
outstanding debt was 6.44% as of November 30, 2013. A hypothetical increase or decrease of 100 basis points would impact the
Company’s interest expense on its variable rate debt by approximately $2.0 million annually.
The Company is subject to foreign currency exchange rate risk. The Company has accumulated currency translation gains of
$0.2 million as of November 30, 2013, which is included in accumulated other comprehensive loss.
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 (1992 COSO framework) (“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 is effective as of
reporting. Management has determined that
November 30, 2013.
the Company’s internal control over
financial
The effectiveness of the Company’s internal control over financial reporting as of November 30, 2013 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2013, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (1992 framework) (the COSO criteria). OMNOVA Solutions Inc.’s management
is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying report titled “Management’s Assessment of Internal Control Over Financial Reporting.”
Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
its inherent
Because of
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.
limitations,
In our opinion, OMNOVA Solutions Inc. maintained, in all material respects, effective internal control over financial reporting as of
November 30, 2013, 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, 2013 and 2012, and the related consolidated
statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the
period ended November 30, 2013 and our report dated January 24, 2014 expressed an unqualified opinion thereon.
Akron, Ohio
January 24, 2014
36
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, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income (Loss) for the years ended November 30, 2013, 2012 and 2011 . . . .
Consolidated Balance Sheets at November 30, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2013, 2012 and 2011 . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended November 30, 2013, 2012 and 2011 . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
Number
38
39
40
41
42
43
44
45
37
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 controls over financial reporting 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, 2014
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2013 and
2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for
each of the three years in the period ended November 30, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended November 30, 2013, in conformity with U.S. generally accepted accounting principles.
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, 2013, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) and our report dated January 24, 2014 expressed an unqualified opinion thereon.
Akron, Ohio
January 24, 2014
39
OMNOVA SOLUTIONS INC.
Consolidated Statements of Operations
Years Ended November 30,
2013
2012
2011
(Dollars in millions, except per share data)
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold (exclusive of depreciation)
$1,018.1
805.4
$1,125.5
898.3
$1,201.1
982.5
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
Other Costs and Expenses:
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) loss on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income), net
212.7
227.2
218.6
118.1
33.6
.2
(4.9)
7.1
31.9
1.5
—
(1.3)
121.2
32.0
1.0
—
1.0
36.5
—
—
(1.4)
108.6
33.5
3.1
1.2
1.6
38.0
1.0
2.3
(.8)
Total Other Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
186.2
190.3
188.5
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations
Discontinued Operations:
Loss from discontinued operations (net of tax benefit of $0.6 million, $0.9 million and $3.8
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Gain on sale of discontinued operations (net of tax of $3.9 million)
million in 2013, 2012 and 2011, respectively)
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.5
6.0
20.5
(.9)
—
(.9)
36.9
11.2
25.7
(4.1)
6.0
1.9
30.1
13.4
16.7
(19.5)
—
(19.5)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
19.6
$
27.6
$
(2.8)
Income Per Share—Basic
Income per share—continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income per share—discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
.44
(.02)
$
.56
.05
.37
(.43)
Basic income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.42
$
.61
$
(.06)
Income Per Share—Diluted
Income per share—continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income per share—discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
.44
(.02)
$
.56
.04
.37
(.43)
Diluted income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.42
$
.60
$
(.06)
Weighted average shares outstanding—Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares outstanding—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.1
46.6
45.6
46.0
44.8
45.2
See notes to consolidated financial statements.
40
OMNOVA SOLUTIONS INC.
Consolidated Statements of Comprehensive Income (Loss)
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of other comprehensive income (loss):
Foreign currency translations
Unrealized net change during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap
Amortization of unrecognized gain on interest rate swap reclassified into interest expense . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized gain on interest rate swap reclassified into interest expense,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement benefit plans:
Actuarial net gain (loss):
Net gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss included in net periodic pension expense . . . . . . . . . . . . . . . . . . . . . .
Prior service credit:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service credit arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credits included in net periodic pension expense . . . . . . . . . . . . .
Curtailment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plans, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended November 30,
2013
2012
2011
(Dollars in millions, except per share data)
$ 19.6
$ 27.6
$ (2.8)
3.5
(1.1)
2.4
—
—
—
35.5
3.6
.1
(.3)
—
(15.2)
23.7
26.1
(5.1)
.8
(4.3)
1.3
1.3
2.6
(39.2)
1.4
—
(.3)
—
15.4
(22.7)
(24.4)
2.1
—
2.1
2.6
(1.0)
1.6
(12.0)
.5
—
(.2)
.1
5.1
(6.5)
(2.8)
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.7
$ 3.2
$ (5.6)
See notes to consolidated financial statements.
41
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—current
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other intangible assets, net
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes—non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2013
2012
(Dollars in millions, except
per share amounts)
$ 164.9
—
123.1
88.1
17.6
8.4
402.1
226.5
73.6
88.9
46.9
9.3
7.4
$ 143.0
5.5
130.1
96.2
14.8
10.7
400.3
222.8
79.6
86.7
65.7
11.3
7.3
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 854.7
$ 873.7
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current Liabilities
Amounts due banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and personal property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes—non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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; 47.9 million and 47.5 million shares issued
as of November 30, 2013 and 2012, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained deficit
Treasury stock at cost; .7 million shares and .6 million shares at November 30, 2013 and 2012,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4.6
92.1
20.4
2.1
1.7
5.8
126.7
250.0
194.0
6.5
67.2
23.3
9.0
676.7
$
9.6
102.8
21.8
2.1
1.8
7.4
145.5
250.0
192.6
7.7
111.4
23.9
12.4
743.5
—
—
4.8
334.6
(67.6)
(5.2)
(88.6)
4.7
331.8
(87.2)
(4.4)
(114.7)
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178.0
130.2
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$854.7
$ 873.7
See notes to consolidated financial statements.
42
OMNOVA SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity
for the Years Ended November 30, 2013, 2012 and 2011
(Dollars and shares in millions)
2011
Balance December 1, 2010 . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss
Cumulative translation adjustment
. . . . . . . . . . . . . . . .
Amortization of unrecognized loss on interest rate
swap (net of tax benefit of $1.0 million) . . . . . . . . . .
Defined benefit plans:
Net actuarial loss (net of tax benefit of $5.1
million)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issuance . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss of acquired business . . . . . . . . . . . . .
Balance November 30, 2011 . . . . . . . . . . . . . . . . . . .
2012
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment (net of tax benefit of
$0.8 million) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized loss on interest rate
swap (net of tax of $1.3 million) . . . . . . . . . . . . . . . .
Defined benefit plans:
Prior service credits (net of tax benefit of $0.9
million)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial loss (net of tax benefit of $14.5
million)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issuance . . . . . . . . . . . . . . . . . . . . . . . .
Balance November 30, 2012 . . . . . . . . . . . . . . . . . . .
2013
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment (net of tax of $1.1
million) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plans:
Prior service credits (net of tax expense of $0.1
million)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial gain (net of tax benefit of $15.1
million)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issuance . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Common
Shares
Outstanding
Common
Stock
Additional
Contributed
Capital
Retained
Deficit
Treasury
Stock
Accumulated
Other
Comprehensive
(Loss) Income
Total
Shareholders’
Equity
45.1
$4.5
$318.0 $(112.0) $(1.3)
$(85.8)
(2.8)
.6
.1
6.9
(1.4)
2.1
1.6
(6.5)
(1.7)
$123.4
(2.8)
2.1
1.6
(6.5)
5.6
(1.7)
45.7
4.6
324.9
(114.8)
(2.7)
(90.3)
121.7
27.6
(4.3)
2.6
.6
(23.3)
1.2
46.9
.1
4.7
6.9
(1.7)
331.8
(87.2)
(4.4)
(114.7)
19.6
2.4
(.1)
23.8
.3
.1
2.8
(.8)
27.6
(4.3)
2.6
.6
(23.3)
5.3
130.2
19.6
2.4
(.1)
23.8
2.1
Balance November 30, 2013 . . . . . . . . . . . . . . . . . . .
47.2
$4.8
$334.6 $ (67.6) $(5.2)
$(88.6)
$178.0
See notes to consolidated financial statements.
43
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:
(Gain) loss on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and write-off of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Insurance settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution to defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended November 30,
2013
2012
2011
(Dollars in millions)
$ 19.6
$ 27.6
$ (2.8)
(4.9)
33.6
2.8
—
.2
.8
2.2
—
1.5
3.9
(.2)
2.8
5.9
(.9)
(10.6)
11.0
(13.0)
(8.8)
(.1)
—
32.0
2.7
(9.9)
1.0
—
4.5
.6
—
8.6
.6
31.7
(15.6)
(.4)
(14.0)
2.5
5.7
(18.7)
6.4
1.2
33.5
2.7
—
3.1
—
3.4
1.8
2.6
10.7
.2
(39.7)
(7.6)
(4.5)
8.8
(19.1)
6.6
(2.8)
17.6
15.7
Net Cash Provided By Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.8
65.3
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of business, less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28.9)
—
—
.2
6.7
—
—
(32.8)
12.4
(24.1)
—
— (271.6)
—
—
1.0
.3
253.2
—
(.6)
—
Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22.0)
(20.1)
(42.1)
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash (Used In) Provided By Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2.0)
34.9
(39.4)
(.6)
5.5
.1
(1.5)
(.4)
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.9
143.0
—
(2.0)
43.8
(45.4)
—
(1.3)
2.0
(2.9)
1.8
44.1
98.9
199.2
(144.0)
96.5
(95.1)
(15.5)
(4.2)
2.4
39.3
14.8
27.7
71.2
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$164.9
$143.0
$ 98.9
Supplemental Cash Flow Information
Capital lease obligations incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.0
$ — $ —
$ 29.7
$ 4.4
$ 32.6
$ 6.5
$ 31.7
3.2
$
See notes to consolidated financial statements.
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note A—Description of Business and Significant Accounting Policies
Description of Business—OMNOVA Solutions Inc. (“OMNOVA” or the “Company”) is an innovator of emulsion polymers,
specialty chemicals and engineered 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 23 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 Engineered Surfaces.
Performance Chemicals—The 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, nitrile
butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, fluorochemicals and bio-based chemistries.
Performance Chemicals’ custom-formulated products are tailored resins, binders, adhesives, specialty rubbers, antioxidants, hollow
plastic pigment and elastomeric modifiers which are used in paper, specialty coatings, carpet, nonwovens, construction, oil/gas
drilling and recovery, adhesives, tape, tire cord, floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses,
bio-based polymers and various other specialty applications. Its products provide a variety of functional properties to enhance the
Company’s customers’ products, including greater strength, adhesion, dimensional stability, water resistance, flow and leveling,
improved processibility and enhanced appearance.
lines. The Performance Materials product
The Performance Chemicals segment consists of two product
line encompasses
products that have applications in the paper, paperboard and carpet industries. Paper and paperboard 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,
line encompasses
environmental, odor,
products that have applications for specialty coatings, nonwovens (such as disposable hygiene products, engine filters, roofing mat,
scrub pads), construction, oil/gas drilling and recovery, adhesives, tape, tire cord, floor care, textiles, graphic arts, polymer
stabilization, industrial rubbers & hoses, bio-based polymers, and various other specialty applications.
flammability and flexible installation requirements. The Specialty Chemicals product
Engineered Surfaces—The Engineered Surfaces segment develops, designs, produces and markets a broad line of
engineered surfacing products, including 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
transportation markets including busses and mass transit vehicles, marine,
cabinets,
automotive and motorcycle OEM seating and manufactured housing, recreational vehicles, medical devices and products and a
variety of industrial films applications.
flooring, ceiling tile and furnishings,
The Engineered Surfaces segment consists of
line applications include
upholstery used in refurbishment and new construction for the commercial office, hospitality, health care, retail, education and
restaurant markets, marine and transportation seating, commercial and residential furniture, automotive soft tops, and automotive
after-market applications. The Laminates and Performance Films product line applications include kitchen and bath cabinets, wall
surfacing, manufactured housing and recreational vehicle interiors, flooring, commercial and residential furniture, retail display
fixtures, home furnishing, commercial appliances, and a variety of industrial film applications.
lines. The Coated Fabrics product
two product
As part of the Company’s strategy to focus on businesses with greater global growth potential, the Company decided to exit
the commercial wallcovering business in the fourth quarter of 2011. The results of operations and cash flows from these businesses
have been classified as discontinued operations for all periods presented (see Note B—Discontinued Operations).
The Company’s operations are located primarily in the United States, France, China, India and Thailand.
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
Basis of Presentation—The consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles and include the accounts of the Company and its wholly owned subsidiaries. All intercompany
balances have been eliminated.
Reclassifications—Certain prior year amounts have been reclassified to conform to current year presentation. Unless
otherwise noted, all disclosures in the notes to the consolidated financial statements relate to the continuing operations of the
Company.
Use of Estimates—The preparation of the consolidated financial statements in conformity with U.S. generally accepted
the amounts reported in the
accounting principles requires management
consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
to make estimates and assumptions that affect
Revenue Recognition—The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an
arrangement exists; 2) delivery has occurred; 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. Delivery is considered to have occurred when the
customer assumes the risk and rewards of ownership. The Company estimates and records provisions for quantity rebates and sales
returns and allowances as an offset to revenue in the same period the related revenue is recognized, based upon its experience.
These items are included as a reduction in deriving 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 recognized as an offset in cost of products sold and 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 and the amount is estimable.
Research and Development Expense—Research and development costs, which were $10.0 million in 2013, $11.5 million in
2012 and $10.7 million in 2011, are charged to expense as incurred.
Advertising Costs—Advertising costs are expensed when incurred. Advertising expense was $0.6 million, $0.7 million and $0.5
million in 2013, 2012 and 2011, 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, 2012,
restricted cash consisted of amounts which were used as compensating deposits against certain foreign borrowings.
Financial Instruments and Fair Value Measurements—Financial assets and financial liabilities carried on the balance sheet
lease obligations, other receivables and
include cash and deposits at financial institutions, trade receivables and payables, capital
payables, borrowings and derivative instruments. The accounting policies on recognition and measurement of these items are disclosed
elsewhere in these financial statements. Fair value is the price that would be received to sell an asset or the price paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
The Company measures financial assets and liabilities at fair value in one of 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.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
(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.
Financial Risk—The Company is mainly exposed to credit, interest rate and currency exchange rate risks which arise in the
normal course of business.
Concentrations of Credit Risk—Credit risk is the potential
loss resulting from the failure of a customer or
counterparty to settle its financial and contractual obligations to the Company as and when they become due. The primary credit
risk for the Company is its accounts and notes receivable, which are generally unsecured. The Company has established credit
limits for customers and monitors their balances to mitigate its risk of loss. Concentrations of credit risk with respect to accounts
receivable are generally limited due to the wide variety of customers and markets using the Company’s products. There was no
single customer who represented more than 10% of the Company’s net sales in 2013 or outstanding net trade receivables at
November 30, 2013 or 2012.
financial
Foreign Currency Risk—The Company incurs foreign currency risk on sales and purchases denominated in other currencies.
The currencies giving rise to this risk are primarily the GB Pound Sterling, the Euro, Thai Baht, Chinese Yuan and Indian Rupee.
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 denominated in U.S. dollars. Risk to the Euro is limited due to natural cash flows netting.
Risk to the GB Pound Sterling is immaterial due to the limited amount of transactions denominated in this currency.
Derivative Instruments—The Company uses, from time to time, certain derivative instruments to mitigate its exposure to
volatility in interest rates and foreign currency exchange rates. The Company recognizes derivative instruments as either an asset or
a liability at their respective fair value. On the date a derivative contract is entered into, the Company may elect to designate the
derivative as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. The Company does not
use fair value or net investment hedges. 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 Comprehensive Income (loss). Amounts in Accumulated
Other Comprehensive Income (loss) are recognized in earnings when the underlying hedged transaction affects earnings.
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 discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in
offsetting changes in the cash flows of the hedged item or management determines that designation of the derivative as a hedging
instrument is no longer appropriate and any prospective gains or losses on the derivative would be recognized in earnings.
Foreign currency exchange contracts are occasionally used by the Company to manage risks from the change in exchange
the Company’s Thailand subsidiary
rates on cash payments between the Company’s foreign subsidiaries. Additionally,
occasionally uses foreign currency exchange contracts 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 limits the impact of foreign exchange rate movements on the Company’s operating
results. As of November 30, 2013, the Company did not have any forward contracts. At November 30, 2012, the fair value of
forward contracts was less than $0.1 million and was recorded as other current assets. These contracts are not designated as
hedging instruments and changes in the fair value of these instruments are recognized in earnings immediately.
The Company does not enter into derivative instruments for trading or speculative purposes.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
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. 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 million and $2.2 million at November 30, 2013 and 2012, respectively.
The Company does not charge interest to its customers on past due accounts receivable.
Inventories—Inventories are stated at the lower of cost or market on a consistent basis. All U.S. based inventory, which
represents 47.5% of the total inventory, is valued using the last-in, first-out (“LIFO”) method. The Company believes the LIFO
method results in a better matching of costs and revenues. The remaining portions of inventories, which are located outside of the
U.S., are valued using the first-in, first-out (“FIFO”) or an average cost method. Inventory costs include direct overhead, freight and
duty.
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 material
preferences 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 Engineered Surfaces segment, was $8.2
million and $10.7 million at November 30, 2013 and 2012, respectively.
Notes Receivable—Notes receivable accepted by the Company are initially recognized at fair value. The Company does not
subsequently adjust the fair value of these notes receivable unless it is determined that the note receivable is impaired. As with its
accounts receivable allowance, the Company considers the issuers financial condition, payment history, credit rating and other
relevant factors when assessing the collectability of the note and to reserve the portion of such note for which collection does not
appear likely.
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
loss is probable and the amount can be estimated. Costs related to
reserve for such matters when it concludes a material
environmental compliance are also accrued when it is probable a loss has been incurred and the amount of loss can be estimated.
Deferred Financing Fees—Debt issuance costs are capitalized and amortized over the life of the related debt. Deferred
financing fee amortization is included in interest expense in the consolidated statements of operations.
Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Construction in process is not
depreciated until the asset is ready for its intended use. Refurbishment costs that extend the useful life of the asset are capitalized,
whereas ordinary maintenance and repair costs are expensed as incurred. Interest expense incurred during the construction phase
is capitalized as part of construction in process until the relevant projects are completed and placed into service.
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
48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
Leasehold improvements are depreciated over the shorter of the lease term, including any expected renewal periods that are
probable to occur, or the estimated useful life of the improvement.
All of the Company’s long-lived assets are reviewed for impairment whenever events or circumstances indicate that
the
carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of
the asset or asset group, an impairment loss is recognized based on the difference between the estimated fair value of the asset or
asset group and its carrying value. Impairment losses related to property, plant and equipment for continuing operations of $1.0
million and $3.1 million were recognized in 2012 and 2011, respectively.
When specific actions to dispose of an asset or group of assets meet certain criteria the underlying assets and liabilities are
adjusted to the lesser of carrying value or fair value and reclassified into a “held for sale” category in the consolidated balance
sheet.
Goodwill and Intangible Assets—Goodwill represents the excess of the purchase price over the fair value of assets
acquired and liabilities assumed in a business combination. Goodwill and other indefinite lived intangible assets are tested for
impairment at least annually as of September 1 and whenever events or circumstances indicate that the carrying amount may not
be recoverable. The Company performs the impairment analysis at the reporting unit level using a two-step impairment test. The
first step identifies potential impairments by comparing the estimated fair value of a reporting unit with its carrying value, including
goodwill and intangible assets. Fair value is typically estimated using a market approach method or a discounted cash flow
analysis, which requires the Company to estimate future cash flows anticipated to be generated by the reporting unit as well as a
discount rate to measure the present value of the anticipated cash flows. If the estimated fair value of a reporting unit exceeds its
carrying value, goodwill is not considered impaired and the second step is not necessary. If the carrying value of a reporting unit
exceeds the fair value, the second step calculates the possible impairment by comparing the implied fair value of goodwill with the
carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment charge is recognized. As of
September 1, 2013, the estimated fair value of the Company’s goodwill exceeds the carrying value.
The impairment test for indefinite lived intangible assets consists of comparing the fair value of the asset with its carrying value.
The Company estimates the fair value of its indefinite lived intangible assets using a fair value model based on a market approach
method or discounted future cash flows. If the carrying amounts exceed the estimated fair value, an impairment loss would be
recognized in the amount of the excess.
Estimating future cash flows requires significant
including sales, operating
margins, royalty rates, discount rates and future economic conditions. To the extent that the reporting unit is unable to achieve
these assumptions, impairment losses may occur.
judgments and assumptions by management
Finite lived 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
lives with periods ranging from 3 to 14 years.
Pension and Other Post-retirement Plans—We account
for our pensions and other post-retirement benefits by
(1) recognizing the funded status of the benefit plans in our statement of financial position, (2) recognizing, as a component of
other comprehensive income or net periodic benefit cost, the gains or losses and prior service costs or credits that arise during the
period, (3) measure defined benefit plan assets and obligations as of the date of the Company’s fiscal year end statement of
financial position, and (4) disclose additional information in the notes to financial statements about certain effects on net periodic
benefit costs for the next fiscal year that arise from delayed recognition of prior service costs or credits and transition assets or
obligations.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
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 the balance sheet date, while revenues and expenses are translated at
the average exchange rates each month during the year. The resulting translation gains and losses on assets and liabilities are
recorded in Accumulated Other Comprehensive Income (loss), and are excluded from net income until realized through sale or
liquidation of the investment.
Gains or losses relating to foreign currency transactions are included in Other expense (income), net in the consolidated
statement of operations and consisted of expense of $0.6 million, $0.2 million and $2.9 million in 2013, 2012 and 2011,
respectively.
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 deferred tax liabilities on certain of its non-U.S. subsidiaries’ undistributed earnings as these
undistributed earnings are treated by the Company as being permanently reinvested. To the extent that foreign earnings previously
treated as permanently reinvested were to be 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.
Determination of the amount of unrecognized deferred tax liabilities and related foreign withholding taxes are not practicable due
to the complexities associated with this hypothetical calculation and the Company’s permanent reinvestment policy. As of
November 30, 2013, the non-U.S. subsidiaries have a cumulative unremitted foreign earnings of $62.5 million for which no
deferred tax liability has 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.
Operating Leases—Lease expense is recognized 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.
Capital Leases—Capital leases are recognized at the lower of fair market value or the present value of future minimum lease
payments with a corresponding amount recognized in property, plant and equipment. Depreciation on assets under capital leases
lease payments are included in Amounts due banks and non-
is included in depreciation expense. Current portions of capital
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note A—Description of Business and Significant Accounting Policies (Continued)
current capital lease obligations are included in Long-term debt in our Consolidated Balance Sheets. The Company has one leased
asset, land for its future corporate headquarters, which is classified as a capital
lease with a present value of minimum lease
payments of $3.0 million as of November 30, 2013. This lease commenced in November 2013 and expires in 20 years at which
time the Company can acquire the land for a nominal amount.
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). Share-based
expense includes expense related to restricted stock and options issued, as well as share units deferred into the Company’s
Deferred Compensation Plan for Non-Employee Directors and performance shares awarded under the Company’s Long-Term
Incentive Plan. The Company did not capitalize any expense related to share-based payments and recognizes share-based
expense within Selling, General and Administrative expense.
Earnings Per Share—The Company uses the two-class method for computing earnings per share where participating
securities are included in the computation of earnings per share. Participating securities include unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or not. The Company did not have
any outstanding participating securities as of November 30, 2013. The Company had weighted-average participating securities
outstanding of 0.2 million and 0.6 million in 2012 and 2011, respectively.
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. There were no other material events or
transactions occurring during this subsequent event period which requires recognition or disclosure in the financial statements.
Accounting Standards Adopted in 2013
In June 2011,
the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” which amended current
comprehensive income guidance. This accounting update requires companies to report comprehensive income in either a single
continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present
the components of other comprehensive income as part of the statement of shareholders’ equity. ASU 2011-05 was effective for the
Company December 1, 2012. The adoption of this ASU did not have an impact on the Company’s consolidated financial position,
results of operations or cash flows.
In July 2012, the FASB issued ASU 2012-02, “Intangibles—Goodwill and Other” which allows an entity to first assess
qualitative factors to determine whether it is more likely than not that an indefinite-lived asset is impaired for determining whether it
is necessary to perform the quantitative impairment test. ASU 2012-02 was effective for the Company December 1, 2012. The
adoption of this ASU did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
Accounting Standards Not Yet Adopted
In February 2013,
the FASB issued ASU 2013-02, “Comprehensive Income” which requires companies to provide
information about the amounts reclassified out of accumulated other comprehensive income by component as well as requiring
additional disclosures for those amounts. This ASU will be effective for the Company on December 1, 2013. The adoption of this
ASU will not have a material impact on the Company’s financial position, results of operations or cash flows.
In March 2013, FASB issued 2013-05 “Foreign Currency Matters” which provides guidance on when to release the
cumulative currency translation adjustment into net income when a parent either sells a part or all of its investment in a foreign
entity. This ASU will be effective for the Company on December 1, 2015. The adoption of this ASU is not expected to have a
material impact on the Company’s consolidated financial position, results of operations or cash flows.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note B—Discontinued Operations
As part of the Company’s strategy to focus on businesses with greater global growth potential, the Company decided to exit
the commercial wallcovering business in the fourth quarter of 2011.
On December 12, 2011, the Company completed the sale of its North American wallcovering business to J. Josephson, Inc., a
private commercial wallcovering producer based in New Jersey. The sale included print cylinders, certain equipment, trademarks,
contracts and other assets associated with the Company’s domestically-produced wallcovering. Under terms of the sale, the
Company received $10.0 million in cash and may receive up to three years of royalty payments based on future sales of
OMNOVA commercial wallcovering patterns. The Company retained the net working capital,
the Columbus, Mississippi
manufacturing facility and certain production assets which were also used by its other businesses.
The Company recognized a net after-tax gain of approximately $6.0 million ($9.9 million before tax) from the sale transaction
during the first quarter of 2012, which represents the excess of the sale price over the book value of the assets sold.
During 2012 and the first quarter of 2013, the Company continued to manufacture commercial wallcovering products for J.
Josephson as part of an orderly transition of production from the Company’s Columbus, Mississippi plant to J. Josephson’s plant in
New Jersey. The Company completed the transition of production by January 31, 2013. The cash flows received and paid by the
Company relating to the manufacture of commercial wallcovering for J. Josephson during 2013 were not significant.
For the North American wallcovering business, the Company allocated the book value of certain shared manufacturing assets,
as well as the associated shared manufacturing and selling costs between the wallcovering products and the coated fabrics
products based on the relative shares of manufacturing volume produced in the Columbus, Mississippi facility. The Company
transferred the production of certain Coated Fabrics products to other company facilities, which was completed during the first
quarter of 2013.
On March 6, 2012, the Company sold its U.K.-based Muraspec commercial wallcovering business to affiliates of a2e Venture
Catalysts Limited and its principal Amin Amiri for $2.4 million in cash and a note receivable for $3.8 million. The note receivable
is secured by a first lien on a building owned by the sold business. The Company recognized losses of $0.9 million related to this
transaction during 2012 to reflect the fair value of the assets and liabilities to be sold to the buyer.
Net sales of the discontinued businesses were $2.1 million, $35.9 million and $70.2 million for 2013, 2012 and 2011,
respectively. Losses before income taxes for the discontinued businesses were $1.5 million, $5.0 million and $23.3 million for
2013, 2012 and 2011, respectively. The loss from discontinued operations in 2013 includes legal costs of $1.3 million related to a
dispute with a former wallcovering customer. In 2011, the loss from discontinued operations includes long-lived asset impairment
charges of $13.6 million and inventory write-downs of $2.9 million.
Note C—Asset Sales
During July 2013, the Company sold to the Columbus Business Center LLC, the land and building of its Columbus, Mississippi
facility for $1.9 million and all of the equipment at that facility for $2.3 million. Proceeds from the sale were comprised of cash of
$1.1 million and a note receivable with a notional amount of $3.1 million of which $2.1 million of the note is payable to the
Company by April 2014 with the balance due by November 2015. The Company recorded the note at its fair value of $2.8 million
at the transaction date. The Company accounted for the land and building sale using the deposit method, as required under ASC
360, “Property, Plant and Equipment—Real Estate Sales” and accordingly, the book value of the land and building remains
included in the Company’s Property, Plant and Equipment (see Note L—Property, Plant and Equipment, Net). The Company
recognized a gain of $1.4 million related to the sale of the equipment component of this transaction during the third quarter of
2013. In a separate transaction, the Company entered into a long-term lease with the buyer to lease a portion of the facility
through the end of 2018 which will be used as a distribution facility for the Coated Fabrics business.
During the fourth quarter of 2013, the Company sold its idled Taicang, China facility for $5.1 million in cash. The Company
recognized a gain of $3.5 million for this transaction.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note D—Restructuring and Severance
The following table is a summary of restructuring and severance charges for 2013, 2012 and 2011:
Severance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closure costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
2011
(Dollars in millions)
$4.5
2.6
$ .5
.5
$1.6
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7.1
$1.0
$1.6
During 2013,
the Engineered Surfaces segment recognized restructuring and severance costs related to its continuing
operations of $5.5 million primarily relating to plant closure costs and workforce reduction actions at its Columbus, Mississippi and
Taicang, China facilities, and the Performance Chemicals segment recognized $1.6 million of severance costs related to
restructuring of its European operations.
During 2012, the Company recognized severance costs of $1.0 million in Engineered Surfaces of which $0.7 million was paid
in 2012 and the remaining balance was paid in the first quarter of 2013. The severance costs were primarily related to the
winding down of production at the Columbus, Mississippi facility.
During 2011, the Company recognized severance costs of $1.1 million in Performance Chemicals, $0.4 million in Engineered
Surfaces and $0.1 million in corporate, all related to workforce reduction actions affecting 28 employees.
The following table summarizes the Company’s liabilities related to restructuring and severance activities:
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 30,
2012
2013
Provision
Payments
November 30,
2013
$—
.3
—
$ .3
(Dollars in millions)
$1.6
$1.6
5.6
5.5
—
—
$7.1
$7.2
$—
.2
—
$ .2
Note E—Asset Impairment
During the fourth quarter of 2013, the Company performed its annual impairment test for indefinite lived intangible assets and
determined that the expected future discounted cash flows of one of its Performance Chemicals segments’ trademarks was lower than
its book value by $0.2 million as a result of lower selling prices, and accordingly, recognized an impairment charge of $0.2 million.
During the fourth quarter of 2012, based on changes in regional market real estate conditions, the Company updated its review of
the fair value of the Columbus, Mississippi facility and as a result, recorded an additional impairment charge of $0.8 million on the
facility and buildings. During the fourth quarter of 2011, the Company determined that indicators of impairment existed in its domestic
and European wallcovering businesses due to lower sales volumes and weaker overhead absorption as well as uncertain and weak
market and economic conditions. As a result, included in discontinued operations, the Company recognized impairment charges of $1.6
million related to the North American wallcovering business and $12.0 million related to the European wallcovering business to write
down long-lived assets to estimated fair value. Additionally, the Company recognized a charge of $2.9 million to write down its North
American wallcovering inventory to its realizable value. Also during the fourth quarter of 2011, the Company determined that during
2012 it would cease production of certain coated fabrics products from its Columbus, Mississippi facility. Coated fabrics products would
be produced at other Engineered Surfaces facilities in an effort to realign capacity utilization. As a result, the Company’s Engineered
Surfaces segment recognized impairment charges of $0.7 million to write down long-lived assets to estimated fair value. For the North
American wallcovering and coated fabrics businesses, the assets were written down to their estimated fair value using an orderly
liquidation value premise based on estimated prices the Company would receive for the underlying assets. For the European
wallcovering business, the asset group was written down to its estimated fair value based on the estimated price the Company would
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note E—Asset Impairment (Continued)
expect to receive for the asset group. 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 the second quarter of 2012, the Company wrote off $0.2 million of assets at
its Taicang, China facility as the
Company updated its review of the assets at the idled facility. During the third quarter of 2011, the Company determined that
indicators of impairment existed at its Taicang, China facility as it revised its forecast for this facility due to weak demand in China
which created excess capacity in the region. During September 2011, the Company idled this facility indefinitely and transferred
production to its Shanghai, China facility in an effort to rebalance production with market demand. Accordingly, the Company’s
Engineered Surfaces segment recognized an impairment charge of $2.4 million to write down long-lived assets, primarily
machinery and equipment, at this facility to their estimated fair value. The key input in this assessment was the estimated cost to a
buyer to acquire substitute assets of comparable utility, adjusted for obsolescence, primarily related to employee severance and
moving costs. 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.
Note F—Other Income (Expense)
Included in other income (expense) in 2013 are insurance recovery proceeds of $0.8 million in settlement of a business
interruption claim and a non-cash impairment charge of $0.9 million for a note receivable to reflect the balance of the note at fair
value. 2012 primarily includes income from scrap material sales. Included in 2011 are losses of $2.8 million on foreign currency
derivative transactions that were settled in 2011, partially offset by income from scrap material sales and a GST tax refund.
Note G—Income Taxes
The components of income from continuing operations before income taxes are as follows:
Income from Continuing Operations Before Income Taxes
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended November 30,
2013
2012
2011
(Dollars in millions)
$13.6
12.9
$26.5
$21.7
15.2
$36.9
$18.5
11.6
$30.1
Years Ended November 30,
2013
2012
2011
(Dollars in millions)
Income Tax Expense (Benefit)
Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. State and Local
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Federal
U.S. State and Local
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1.1)
.2
3.0
2.1
6.1
.9
(3.1)
3.9
$ —
.1
2.5
2.6
7.0
(.6)
2.2
8.6
Income Tax Expense (Benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.0
$11.2
$ (.2)
.9
2.0
2.7
6.7
(.4)
4.4
10.7
$13.4
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note G—Income Taxes (Continued)
Years Ended November 30,
2013
2012
2011
Effective Income Tax Rate
Tax at Federal Statutory Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance (reversal) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible executive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes at different rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign stock sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
French business tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of OCI tax to continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
35.0%
.4
2.3
3.7
(13.9)
(7.6)
4.1
(2.2)
2.7
(3.7)
—
1.8
35.0%
.7
1.2
1.0
(5.0)
(4.3)
.7
—
1.3
(2.1)
4.8
(3.0)
35.0%
10.1
6.3
3.0
(6.3)
(5.4)
3.4
3.0
2.2
(4.5)
—
(2.3)
Effective Income Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.6%
30.3%
44.5%
Deferred Taxes
November 30,
2013
2012
(Dollars in millions)
Assets
Liabilities
Assets
Liabilities
Accrued estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOLCs and other carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-retirement employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.1
—
—
23.6
62.2
5.0
—
(16.0)
$ —
29.3
22.5
—
—
—
.1
—
$ 9.4
—
—
39.7
61.9
6.3
1.9
(14.3)
$ —
25.5
27.0
—
—
—
—
—
Deferred Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 83.9
$51.9
$104.9
$52.5
As of November 30, 2013,
the Company had approximately $113.6 million of domestic federal net operating loss
carryforwards (NOLCs), $108.9 million of state and local NOLCs, $0.4 million of foreign tax credit carryforwards and $0.2
million of AMT credit carryforwards. The majority of the federal, state and local NOLCs expire in the years 2022 through 2032
while the foreign tax credit carryforwards expire between 2014 and 2022. The Company had approximately $19.6 million of
domestic capital loss carryforwards, which are expected to expire by the tax year 2017. The Company has provided a valuation
allowance against the capital loss carryforwards as the Company does not anticipate the opportunity to utilize the carryforwards
before they expire. As of November 30, 2013, the Company had approximately $32.1 million of foreign NOLCs of which $23.7
million have an indefinite carryforward period. Of the $23.7 million foreign NOLCs which have an indefinite carryforward period,
them, as the Company does not anticipate utilizing these
$21.6 million have a valuation allowance provided against
carryforwards. Cash paid for income taxes in 2013, 2012 and 2011 was $4.4 million, $6.5 million and $3.2 million, respectively,
and related primarily to state and foreign income taxes.
At November 30, 2013, the total unrecognized tax benefits were $0.8 million excluding $0.4 million of penalties and interest.
The total amount of penalties and interest recognized in the statement of financial position was $0.4 million and $1.1 million as of
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note G—Income Taxes (Continued)
November 30, 2013 and 2012, respectively. Of the total $0.8 million of unrecognized tax benefits as of November 30, 2013,
$0.6 million would, if recognized, impact
the Company’s effective tax rate. The amount of unrecognized tax benefits which
impacted the Company’s effective tax rate in 2013, 2012 and 2011 was $1.9 million, $1.6 million and $1.6 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits excluding interest and penalties is as
follows:
(Dollars in millions)
Years Ended November 30,
2013
2012
2011
Opening balance December 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase based on tax positions related to acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase based on tax positions related to prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease based on tax positions in the prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction due to lapse of statue of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.3
—
—
(.4)
(3.1)
—
$10.6
$ 3.8
— 10.7
—
1.0
(.1)
(3.3)
(3.9)
(3.7)
.1
(.3)
Ending balance November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .8
$ 4.3
$10.6
Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense. For the
year 2013, the Company recognized an income tax benefit related to interest and penalties of $0.7 million. The Company
recognized income tax expense related to interest and penalties of $0.4 million in 2012 and expense of $0.2 million in 2011.
During the next twelve months, due to the expiration of open statutes of limitations, the Company’s unrecognized tax benefits,
excluding interest and penalties, are expected to decrease by $0.2 million. None of this $0.2 million expected decrease, if
recognized, would impact the Company’s effective rate. It is also possible that additional unrecognized tax benefits could arise
during the next twelve months 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 2008.
Note H—Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows:
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized loss on interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
.2
—
(88.8)
$ (2.2) $ 2.1
(2.6)
(89.8)
—
(112.5)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(88.6) $(114.7) $(90.3)
November 30,
2013
2012
2011
(Dollars in millions)
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note H—Accumulated Other Comprehensive Income (Loss) (Continued)
The following table provides additional details of
the amounts recognized into net earnings from accumulated other
comprehensive earnings (loss):
Foreign
Currency
Items
Unrealized
Loss on
Interest
Rate Swap
Defined
Benefit
Plans
Accumulated
Other
Comprehensive
Loss
(Dollars in millions)
Balance—November 30, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive earnings (loss) before reclassifications . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
Amounts reclassified from accumulated other comprehensive earnings (loss)
$ —
2.1
—
—
Balance—November 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive earnings (loss) before reclassifications . . . . . . . . . . . . . . . .
. . .
Amounts reclassified from accumulated other comprehensive earnings (loss)
Balance—November 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive earnings (loss) before reclassifications . . . . . . . . . . . . . . . .
. . .
Amounts reclassified from accumulated other comprehensive earnings (loss)
2.1
(4.3)
—
(2.2)
2.4
—
$(4.2)
—
—
1.6
(2.6)
—
2.6
—
—
—
$ (81.6)
(6.7)
(1.7)
.2
(89.8)
(23.4)
.7
(112.5)
21.4
2.3
$(85.8)
(4.6)
(1.7)
1.8
(90.3)
(27.7)
3.3
(114.7)
23.8
2.3
Balance—November 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .2
$ — $ (88.8)
$(88.6)
57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note I—Earnings Per Share
The following table sets forth the computation of earnings per common share and earnings per common share—assuming
dilution (in millions, except per share amounts):
Years Ended November 30,
2013
2012
2011
Basic Earnings Per Share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.5
—
$25.7
.1
$ 16.7
—
Income from continuing operations allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.5
$25.6
$ 16.7
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations allocated to participating securities . . . . . . . . . . . . . . . . . . .
$ (.9) $ 1.9
—
—
$(19.5)
—
(Loss) income from discontinued operations allocated to common stockholders . . . . . . . . . . . . . . . . . . . .
$ (.9) $ 1.9
$(19.5)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.6
—
$27.6
.1
$ (2.8)
—
Net income (loss) allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.6
$27.5
$ (2.8)
Weighted-average common shares outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.1
45.6
44.8
Income from continuing operations per common share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .44
$ .56
$ .37
(Loss) income from discontinued operations per common share—basic . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (.02) $ .05
$ (.43)
Net income (loss) per common share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .42
$ .61
$ (.06)
Diluted Earnings Per Share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.5
—
$25.7
.1
$ 16.7
—
Income from continuing operations allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.5
$25.6
$ 16.7
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations allocated to participating securities . . . . . . . . . . . . . . . . . . .
$ (.9) $ 1.9
—
—
$(19.5)
—
(Loss) income from discontinued operations allocated to common stockholders . . . . . . . . . . . . . . . . . . . .
$ (.9) $ 1.9
$(19.5)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income allocated to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.6
—
$27.6
.1
$ (2.8)
—
Net income (loss) allocated to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.6
$27.5
$ (2.8)
Weighted-average common shares outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.1
.5
45.6
.4
Weighted-average common shares outstanding—assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.6
46.0
44.8
.4
45.2
Income from continuing operations per common share—assuming dilution . . . . . . . . . . . . . . . . . . . . . . .
$ .44
$ .56
$ .37
Income (loss) from discontinued operations per common share—assuming dilution . . . . . . . . . . . . . . . . .
$ (.02) $ .04
$ (.43)
Net income (loss) per common share – assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .42
$ .60
$ (.06)
58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note I—Earnings Per Share (Continued)
The following table reconciles the weighted average common shares used in the basic and diluted earnings per share
disclosures to the total weighted-average shares outstanding (in millions):
Weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average participating shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total weighted-average shares outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended November 30,
2013
2012
2011
46.1
—
46.1
.5
45.4
.2
45.6
.4
44.2
.6
44.8
.4
Total weighted-average shares outstanding—assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.6
46.0
45.2
Certain options to purchase common stock and unearned restricted stock of the Company were anti-dilutive and consisted of
.1 million, 0 million and .6 million shares during 2013, 2012 and 2011, respectively. These potential shares were not included in
the computation of net income per common share—assuming dilution.
Note J—Accounts Receivable
The Company’s net accounts receivable of $123.1 million are generally unsecured. There is no customer who represented
more than 10% of the Company’s net trade receivables at November 30, 2013 or 2012. The allowance for doubtful accounts was
$2.0 million and $2.2 million at November 30, 2013 and 2012, respectively. Write-offs of uncollectible accounts receivable
totaled $0.2 million, $0.8 million and $0.1 million in 2013, 2012 and 2011, respectively. The provision for bad debts was zero in
2013 and $0.6 million and $1.8 million in 2012 and 2011, respectively.
During 2011, one of the Company’s Performance Chemicals customers filed for bankruptcy protection. As a result, the
Company recognized a charge of $0.9 million which was included in selling, general and administrative expenses.
Note K—Inventories
November 30,
2013
2012
(Dollars in millions)
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 40.1
5.6
72.3
$ 48.6
6.4
81.8
Acquired cost of inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of acquired cost over LIFO cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obsolesence reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118.0
(21.7)
(8.2)
136.8
(29.9)
(10.7)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 88.1
$ 96.2
Inventories valued using the LIFO method represented $56.1 million or 47.5% and $71.4 million or 52.2% of inventories at
November 30, 2013 and 2012, respectively. The decrease was primarily due to higher Coated Fabrics inventory levels at the end
of 2012 in advance of the transition of Coated Fabrics production from the Columbus, Mississippi facility and lower raw material
costs.
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note K—Inventories (Continued)
In 2013 and 2011, inventory quantities declined in both segments 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 $6.2 million and $1.2 million for 2013 and 2011, respectively. In 2012, the Company
recognized non-cash LIFO expense in continuing operations of $2.6 million.
Note L—Property, Plant and Equipment, Net
November 30,
2013
2012
(Dollars in millions)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17.9
127.7
397.6
32.8
$ 14.1
130.1
449.3
25.8
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
576.0
(349.5)
619.3
(396.5)
Property, Plant and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 226.5
$ 222.8
Included in Land, Building and improvements and Accumulated depreciation as of November 30, 2013 is $0.7 million, $9.6
million and $8.7 million, respectively, related to assets which the Company has sold and are being accounted for using the deposit
method as required under ASC 360, “Property, Plant and Equipment—Real Estate Sales.”
Depreciation expense was $28.0 million, $26.0 million and $27.4 million in 2013, 2012 and 2011, respectively. Included in
depreciation expense is $22.2 million, $21.5 million and $23.4 million in 2013, 2012 and 2011, respectively, related to
depreciation of manufacturing facilities and equipment.
As of November 30, 2013 and 2012, the Company had $2.4 million and $3.3 million, respectively, of unamortized software
costs included in machinery and equipment, primarily related to an Enterprise Resource Program (ERP) system, which the Company
began implementing during 2005. Depreciation expense of software costs was $0.7 million, $1.0 million and $1.7 million in
2013, 2012 and 2011, respectively. The Company is depreciating these costs over five years.
Also included in depreciation expense in 2013 is $1.0 million of accelerated depreciation expense related to assets for which
to consolidate, upgrade and improve
production will be transferred to another Performance Chemicals facility in an effort
processes.
Note M—Goodwill and Other Intangible Assets
Goodwill
The following table reflects changes in the carrying value of goodwill:
Balance at December 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at November 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
$88.0
(1.3)
86.7
2.2
Balance at November 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$88.9
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note M—Goodwill and Other Intangible Assets (Continued)
Intangible Assets
The following table summarizes the Company’s intangible assets as of November 30, 2013 and 2012:
November 30, 2013
November 30, 2012
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Weighted
Average Life
(Years) at
November 30,
2013
(Dollars in millions)
Finite-lived intangible assets
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical know-how . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land use rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9.6
7.5
17.8
38.7
6.4
1.9
$ 9.6
6.6
10.3
9.7
.9
1.9
$ 9.6
7.5
17.2
37.5
7.8
1.9
$ 9.4
6.4
8.0
6.4
.7
1.9
$ 81.9
$39.0
$ 81.5
$32.8
0
8.9
3.7
9.9
54.6
0
13.3
Indefinite lived intangible assets
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 30.7
$ —
$ 30.9
$ —
N/A
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$112.6
$39.0
$112.4
$32.8
Amortization expense for finite-lived intangible assets was $5.6 million, $6.0 million and $6.1 million for the years ended
November 30, 2013, 2012 and 2011, respectively. During 2013, the Company recognized an impairment loss of $0.2 million for
one of its trademarks.
The following table summarizes expected future annual amortization expense for the Company’s finite-lived intangible assets:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in millions)
$ 5.2
5.1
5.1
4.6
2.9
20.0
$42.9
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note N—Debt and Credit Lines
Amounts Due Banks
Amounts due banks consist of the following debt obligations that are due within the next twelve months:
November 30,
2013
2012
(Dollars in millions)
$200 million Term Loan B—current portion (interest at 4.25%)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign subsidiaries borrowings (interest at 0.7%—12.9%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.0
2.6
$2.0
7.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4.6
$9.6
The Company has borrowing facilities at certain of its foreign subsidiaries in China, India, and Thailand, which consist of
working capital credit lines and facilities for the issuance of letters of credit. Borrowings by foreign subsidiaries that were unsecured
totaled $2.6 million and $3.6 million at November 30, 2013 and 2012, respectively. Foreign borrowings that were secured by a
compensating cash balance in the U.S. were $4.0 million at November 30, 2012. As of November 30, 2013, total borrowing
capacity for foreign working capital credit lines and letters of credit facilities was $16.4 million, of which $2.6 million has been
utilized as borrowings and $3.7 million utilized as letters of credit issued.
The Company’s long-term debt consists of the following:
November 30,
2013
2012
(Dollars in millions)
$200 million Term Loan B (interest at 4.25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Unsecured Notes (interest at 7.875%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Revolving Credit Facility (interest at 1.92%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$194.0
250.0
3.0
—
$196.0
250.0
—
—
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
447.0
(2.0)
(1.0)
446.0
(2.0)
(1.4)
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$444.0
$442.6
Payments on long-term debt (excluding capital lease obligations) over the next 5 years are as follows:
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.0
$ 2.0
$ 2.0
$ 2.0
$436.0
(Dollars in millions)
Senior Unsecured Notes
The Senior Unsecured Notes (“Senior Notes”) have a face value of $250 million with a 7.875% interest rate which is payable
semi-annually. The Senior Notes mature on November 1, 2018 and are unsecured. The Company may redeem a portion of the
outstanding Senior Notes any time after October 31, 2014 at a premium above par, subject to certain restrictions. The Senior
Notes are fully and unconditionally and jointly and severally guaranteed on a senior, unsecured basis by all of OMNOVA
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note N—Debt and Credit Lines (Continued)
Solutions Inc.’s existing and future material domestic subsidiaries that from time to time guarantee obligations under the Company’s
Senior Notes.
Term Loan
The Company also has a $200 million Term Loan (“Term Loan”) (balance of $194.0 million on November 30, 2013) which
was amended on March 7, 2013. The amendment extended the maturity date of the Term Loan by one year and reduced the
borrowing spreads as described below. The Term Loan is secured by all real property and equipment of the Company’s U.S.
facilities and guaranteed by the material U.S. subsidiaries of the Company. The 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”) subject to a floor of 1.25%. The applicable margin
for the Eurodollar rate is 3.0%. 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%, subject
to a floor of 2.25%. The
applicable margin for the base rate is 2.00%. Annual principal payments consist of $2.0 million, due in quarterly installments, and
potential annual excess free cash flow payments as defined in the Term Loan agreement, with any remaining balance to be paid on
May 31, 2018. The Company was not required to make any excess free cash flow payments for 2013 and does not expect to
make any for 2014. 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. 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, provided that certain requirements are met. 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 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 is in compliance with this
covenant with a senior secured net leverage ratio of .3 to 1 at November 30, 2013. The Company’s EBITDA, as defined in the
Term Loan for covenant purposes, was $97.0 million for 2013 which provided a cushion of approximately $85.0 million for
covenant measurement purposes.
The Company issued the Term Loan in 2010 at a discount of $2.0 million, receiving cash of $198 million. This original issue
discount is reflected as a reduction of debt outstanding and is being amortized over the respective term of the debt as a non-cash
component of interest expense.
Senior Revolving Credit Facility
The Company also has a Senior Secured Revolving Credit Facility (“Facility”), with potential availability of $100 million, which
can be increased up to $150 million subject to additional borrowing base assets and lender approval. The Facility was amended
on April 5, 2013. The Facility matures December 9, 2017. The Facility is secured by U.S. accounts receivable, inventory
(collectively the “Eligible Borrowing Base”) and intangible assets. Availability under the Facility will fluctuate depending on the
Eligible Borrowing Base and is determined by applying customary advance rates to the Eligible Borrowing Base. The Facility
includes a $15 million sub-limit for the issuance of commercial and standby letters of credit and a $10 million sub-limit for
swingline loans. Outstanding letters of credit on November 30, 2013 were $2.2 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 $25 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 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 $25 million during any
quarter of 2013 and averaged $70.9 million during the fourth quarter of 2013.
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note N—Debt and Credit Lines (Continued)
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 Eurodollar rate is a periodic fixed rate equal to LIBOR. Applicable
margins are based on the Company’s average daily excess availability during the previous fiscal quarter. If average excess
availability is greater than or equal to $50 million, the applicable margin will be 1.75% on Eurodollar loans and 0.75% on base
rate borrowings. If average excess availability is greater than or equal to $25 million but less than $50 million, the applicable
margin will be 2.0% on Eurodollar loans and 1.0% on base rate borrowings. If average excess availability is less than $25 million,
the applicable margin will be 2.25% on Eurodollar loans and 1.25% on base rate borrowings. The commitment fee for unused
credit lines will be 0.25% if outstanding borrowings on the Facility are greater than or equal to 50% of the maximum revolver
amount and 0.375% if outstanding borrowings are less than 50% of the maximum revolver amount.
At November 30, 2013, the Company had $63.1 million of eligible inventory and receivables to support the borrowing base
which is capped at $100 million under the Facility. At November 30, 2013, letters of credit outstanding under the Facility were
$2.2 million, there were no amounts borrowed under the Facility and the amount available for borrowing under the Facility was
$60.9 million.
Capital Lease Obligations
At November 30, 2013, the Company has one asset under capital lease totaling $3.0 million, which is included in land.
The following is a schedule by year of future minimum lease payments for this capital lease together with the present value of
the net minimum lease payments as of November 30, 2013.
Year Ending November 30:
(Dollars in millions)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Amount representing estimated executory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Amount representing interest
$ —
—
—
.2
.2
3.6
4.0
(.1)
3.9
(.9)
Present value of minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3.0
Additionally, in November 2013, the Company entered into a financing lease with the Cleveland Port Authority for the future
corporate headquarters building. The lease is effective upon the completion of construction of the building, which is expected to be
November 2014. During the construction period, the Company will recognize construction costs as they are incurred as increases in
property, plant and equipment with an offsetting current liability. At the end of the construction period, the Company will recognize the
current liability as a financing lease and record the minimum present value of the lease payments, which is currently estimated to be
approximately $14.0 million.
Deferred Financing Fees
Deferred financing costs incurred in connection with the issuance of the Senior notes, the Term Loan and the Facility are being
amortized over the respective terms of the underlying debt, including any amendments. Total amortization expense of deferred
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note N—Debt and Credit Lines (Continued)
financing costs was $2.3 million, $2.7 million and $2.7 million for 2013, 2012 and 2011, respectively. As a result of the refinancing
actions relating to the Term Loan and the Facility during the second quarter of 2013, the Company incurred $1.2 million of fees, of
which $0.9 million were expensed in the second quarter of 2013 and the remainder were recognized as deferred financing fees to be
amortized over the term of the debt. Additionally, $0.4 million of existing deferred financing fees and $0.2 million of existing deferred
original issue discount fees were written off.
The weighted-average interest rate on the Company’s debt was 6.4% for 2013 and 6.9% for 2012.
Cash paid for interest was $29.7 million, $32.6 million and $31.7 million for 2013, 2012 and 2011, respectively.
Note O—Employee Benefit Plans
The Company maintains a number of defined benefit and defined contribution plans to provide retirement benefits for employees.
These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974
(“ERISA”), local statutory law or as determined by the Board of Directors. The plans generally provide benefits based upon years of
service and compensation. Pension plans are funded except for a domestic non-qualified pension plan for certain key employees and
certain foreign plans. The Company uses a November 30 measurement date for its plans.
Defined Benefit Plans
The Company’s defined benefits plans generally provide benefits based on years of service and compensation for salaried
employees and under negotiated non-wage based formulas for union-represented employees.
Changes in benefit obligations and plan assets are as follows:
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid net of retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
(Dollars in millions)
$306.4
1.7
12.3
(.1)
(20.6)
(16.2)
.5
$ 259.4
1.5
13.8
—
47.1
(15.3)
(.1)
Benefit Obligation at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$284.0
$ 306.4
Change in Plan Assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits and expenses paid net of retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$194.3
28.8
8.8
.6
(16.2)
$ 167.8
23.1
18.4
.3
(15.3)
Fair Value of Plan Assets at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$216.3
$ 194.3
Funded Status at November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (67.7) $(112.1)
Amounts Recognized in the Consolidated Balance Sheets
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(.5) $
(.7)
(111.4)
(67.2)
Net Amount Recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (67.7) $(112.1)
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
As of November 30, 2013 and 2012, the amounts included in Accumulated Other Comprehensive Loss that have not yet been
recognized in net periodic benefit cost consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(114.0) $(153.2)
$ —
$
.1
The after-tax amount of unrecognized net actuarial loss at November 30, 2013 was $109.8 million. The estimated net loss for
defined benefit plans that will be amortized from Accumulated Other Comprehensive Loss during 2014 is $4.2 million.
2013
2012
(Dollars in millions)
Net Periodic Benefit Cost
Net Periodic Benefit Cost
2013
2012
2011
(Dollars in millions)
Service costs for benefits earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs on benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.7
12.3
—
(14.7)
5.0
—
$ 1.5
13.8
—
(14.2)
3.0
—
$ 1.7
14.2
.1
(14.9)
2.4
.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4.3
$ 4.1
$ 3.6
The Company made $8.8 million and $18.4 million in contributions to its plans during 2013 and 2012, respectively. The
Company anticipates that it will be required to make a contribution to its pension plans of $5.1 million in 2014. The Company
anticipates pension expense to be approximately $4.4 million in 2014.
Future service benefits are frozen for all participants under the Company’s U.S. defined benefit plan. All benefits earned by
affected employees through the effective dates have become fully vested with the affected employees eligible to receive benefits upon
retirement, as described in the Plan document.
Estimated future benefit payments to retirees from the Company’s pension plans are as follows: 2014—$15.8 million, 2015—
$15.7 million, 2016—$16.2 million, 2017—$16.8 million, 2018—$17.2 million and thereafter $91.4 million.
Information regarding pension plans with accumulated benefit obligations in excess of plan assets is as follows:
U.S. Pension Plans
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. Pension Plans
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
2013
2012
(Dollars in millions)
$271.4
$271.4
$216.0
$293.4
$293.4
$194.1
$ 12.4
$ 9.5
.3
$
$ 12.7
$ 9.6
.2
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
Assumptions
Weighted average assumptions used to measure the benefit obligation for the Company’s defined benefit plans as of
November 30, 2013 and 2012 were as follows:
Pension Plans
2013
2012
Weighted Average Assumptions
Discount rate used for liability determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual rates of salary increase (non-U.S. plans)
Measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.74% 4.10%
3.56% 3.40%
11/30
11/30
Weighted average assumptions used to measure the net periodic benefit cost for the Company’s defined benefit plans as of
November 30, 2013, 2012 and 2011 were as follows:
Pension Plans
2013
2012
2011
Weighted Average Assumptions
Discount rate used for expense determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual rates of salary increase (non-U.S. plans) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10% 5.52% 5.83%
7.75% 7.75% 8.00%
3.40% 3.07% 2.37%
The discount rate used for the liability measurement reflects the current rate at which the pension liabilities could be effectively
settled at
the end of the year. The discount rate used considers a yield derived from matching projected pension payments with
maturities of a portfolio of available zero-coupon bonds that receive a credit rating of “AA” or better given by a recognized investment
ratings agency. Prior to 2013, the discount rate was derived from matching projected pension payments with maturities of a portfolio of
available non-callable bonds that receive one of the two highest ratings given by a recognized investment ratings agency. The decrease
in the discount rate in both 2013 and 2012 is due to lower yields for these types of investments as a result of the economic environment.
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’ portfolios. 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 rate of compensation increase is based on
management’s estimates using historical experience and expected increases in rates.
Pension Plans Assets
The Company’s defined benefit plans are funded primarily through asset trusts or through general assets of the Company. The
Company employs a total return on investments approach for its U.S. 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
acceptable risk. Asset allocation at November 30, 2013, target allocation for 2013 and expected long-term rate of return by asset
category are as follows:
Asset
Category
Target
Allocation
2013
Percentage of Plan Assets
At November 30,
2013
2012
Weighted-
Average Expected
Long-Term Rate
Of Return
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54%
28%
4%
14%
56%
27%
2%
15%
54%
27%
3%
16%
5.3%
2.1%
.3%
1.6%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
7.75%
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
Included in Other are hedge funds and short-term money market funds.
The following tables sets forth, by level within the fair value hierarchy, the U.S. defined benefit plans’ assets at November 30, 2013
and November 30, 2012:
2013
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Registered investment companies:
Total
Level 1
Level 2
Level 3
(Dollars in millions)
$
.6
$
.6
$— $ —
Equity mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120.5
57.4
120.5
57.4
Total registered Investment companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
177.9
177.9
Collective trust funds:
Collateralized loan obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total collective trust funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32.4
32.4
5.1
—
—
—
—
—
—
—
—
—
—
—
—
32.4
32.4
5.1
2012
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Registered investment companies:
$216.0
$178.5
$— $37.5
$
.1
$
.1
$— $ —
Equity mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103.8
52.5
103.8
52.5
Total registered Investment companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156.3
156.3
Collective trust funds:
Private investment funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized loan obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total collective trust funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0
30.2
31.2
6.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1.0
30.2
31.2
6.5
$194.1
$156.4
$— $37.7
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.
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.
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 Company 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.
68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
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, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses included in funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40.2
(9.6)
7.1
$32.9
(9.6)
7.9
Ending balance, November 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37.7
$31.2
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gains or losses included in funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.6)
1.4
(1.0)
2.2
$7.3
—
(.8)
$6.5
(.6)
(.8)
Ending balance, November 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37.5
$32.4
$5.1
For Level 3 investments in the Company’s U.S. defined benefit plan, the Benefits Committee, which is comprised of certain
executives of the Company, uses third party services as the primary basis for valuation of these investments. The third party services do
not provide access to valuation models, inputs and assumptions. Accordingly, the Benefits Committee conducts a review of a variety of
factors including internal controls reports and financial statements of
the investment, economic conditions, industry and market
developments and overall credit ratings as well as utilizing a vendor review of the fund.
The following table summarized the quantitative inputs and assumptions used for items categorized as recurring Level 3 assets as
of November 30, 2013.
Financial Assets
Fair Value
Valuation Techniques
Unobservable Inputs
Ranges
Real estate partnerships
(Dollars in Millions)
$5.1
—
$5.1
Discounted cash flow
analysis
Appraisals
Discount Rate
Exit capitalization rate
DCF term (years)
Comparable sales
7.0% - 15.0%
6.0% - 10.0%
10 - 11
N/A
The following table sets forth a summary of the Plan’s investments with a reported NAV, which is a practical expedient
to
estimating fair value, as of November 30, 2013 (dollars in millions).
SEI Structured Credit Collective Fund(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$32.4
Fair Value
(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 and has surpassed the two-year non-
redemption period.
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
Defined Contribution Plans
The Company also sponsors a defined contribution 401(k) plan. Participation in this plan is available to substantially all U.S.
salaried employees and to certain groups of U.S. hourly employees. Company 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. Prior to December 1, 2012, all Company contributions were made with Company stock. Effective December 1,
2012, all Company contributions are made in cash. Contribution expense to this plan was approximately $2.7 million in 2013, $2.4
million in 2012 and $1.8 million in 2011. The defined contribution 401(k) plan contained approximately 1.6 million shares at
November 30, 2013 and 2.0 million shares at November 30, 2012 of the Company’s common stock.
Health Care Plans
The Company provides retiree medical plans for certain active and retired U.S. employees of which there were 941 retired
participants as of November 30, 2013. 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
benefits. Retirees in certain other countries are provided similar benefits by plans sponsored by local 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, 2013 and would have no effect on the aggregate
of the service and interest components of the net periodic cost.
Changes in benefit obligations are as follows:
Change in Benefit Obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid net of retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2012
(Dollars in millions)
$ 8.5
.3
(.9)
(.7)
$ 8.7
.4
.1
(.7)
Benefit Obligation at End of Year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7.2
$ 8.5
Change in Plan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits and expenses paid net of retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
.7
(.7)
$ —
.7
(.7)
Fair Value of Plan Assets at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
$ —
Funded Status at November 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(7.2)
$(8.5)
Amounts Recognized in the Consolidated Balance Sheets
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (.7)
(6.5)
$ (.8)
(7.7)
Net Amount Recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(7.2)
$(8.5)
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
As of November 30, 2013 and 2012, the amounts included in Accumulated Other Comprehensive Loss that have not yet been
recognized in net periodic benefit cost consist of:
Net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service credit
$17.4
$ .4
$17.9
$ .6
2013
2012
(Dollars in millions)
Net Periodic Benefit Cost
2013
2012
2011
(Dollars in millions)
Net Periodic Benefit Cost (Income)
Service costs for benefits earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest costs on benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ .1
.4
(.3)
(1.9)
.3
(.3)
(1.4)
.4
(.3)
(1.6)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1.4) $(1.5) $(1.7)
Estimated future benefit payments and Medicare Part D subsidies for the retiree health care plans are as follows:
Benefit
Payments
Medicare
Part D
Subsidy
(Dollars in millions)
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019—2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .8
$ .8
$ .8
$ .7
$ .7
$3.0
$.1
$.1
$.1
$.1
$.1
$.5
The Company expects to record non-cash retiree medical health care reduction of expenses of approximately $1.4 million in
2014.
The estimated net actuarial gain and prior service credit for retiree medical plans that will be amortized from Accumulated
Other Comprehensive Loss during 2014 are $1.4 million and $0.3 million, respectively.
Assumptions
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.39% 3.73% 5.18%
4.9%
5.2%
8.0%
7.8%
4.5%
4.5%
3.7%
7.6%
4.5%
2028
11/30
2028
11/30
2028
11/30
2013
2012
2011
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note O—Employee Benefit Plans (Continued)
The discount rate reflects the current rate at which the retiree medical liabilities could be effectively settled at the end of the
year. The discount rate used considers a yield derived from matching projected health care payments with maturities of a portfolio
of available non-callable bonds that receive one of the two highest ratings given by a recognized investment ratings agency. The
decrease in the discount rate in both 2013 and 2012 is due to lower yields for these types of investments as a result of the
economic environment.
Note P—Contingencies and Commitments
Litigation
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 ultimate resolution of these matters will have a material
effect on the consolidated financial condition, results of operations or cash flows of the Company.
In August 2010,
the Company was sued by the insurer of Mafcote International claiming the Company’s Jeannette,
Pennsylvania plant had impeded the flow of water in an adjacent creek during an unusually severe storm resulting in water
damage to Mafcote’s plant. After trial in November 2012, Mafcote was initially awarded $3.4 million in damages. The Company’s
insurer has accepted coverage. The Company has a $0.5 million insurance deductible, of which approximately $0.4 million has
been paid through November 30, 2013.
the Company’s insurer settled the matter with Mafcote for
$2.8 million. Accordingly, as of November 30, 2013, the Company recognized a liability of $2.8 million and an insurance
receivable of $2.7 million.
In December 2013,
Leases
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 on operating leases was $6.6 million in 2013, $6.0 million in 2012 and
$6.1 million in 2011. Future minimum commitments at November 30, 2013 for non-cancelable operating leases were
$65.0 million with annual amounts of $5.7 million in 2014, $5.4 million in 2015, $5.0 million in 2016, $4.6 million in 2017,
$3.6 million in 2018 and $40.7 million for leases after 2018. Included are lease payments on the Company’s future corporate
headquarters for which the lease payments commence in January 2015. Annual obligations under capital leases are disclosed in
Note N—Debt and Credit Lines.
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 Sheets as of November 30, 2013, and 2012 reflects reserves for environmental remediation of
to change and actual results may materially differ from the Company’s
$0.6 million. The Company’s estimates are subject
estimates. Management believes, on the basis of presently available information, that resolution of known environmental matters
will not materially affect liquidity, capital resources or the consolidated financial condition of the Company.
72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note P—Contingencies and Commitments (Continued)
Collective Bargaining Agreements
At November 30, 2013, the Company employed approximately 2,300 employees at offices, plants and other facilities located
principally throughout the United States, France, China, India and Thailand. Approximately 10.0% or 230 of the Company’s
employees are covered by collective bargaining agreements in the United States. In addition, certain of the Company’s foreign
two labor contracts expire, covering
employees are also covered by collective bargaining agreements. During 2014,
approximately 150 employees.
Note Q—Share-Based Compensation Plans
The OMNOVA Solutions Third 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, by virtue of the three amendments approved by shareholders since the original plan
was approved in 1999, authorizes up to 9.6 million shares of Company stock in the aggregate for a) awards of options to
purchase shares of OMNOVA Solutions’ common stock; b) performance stock and performance units; c) restricted stock; d)
deferred stock; or e) appreciation rights. Shares used may be either newly issued shares or treasury shares or both. As of
November 30, 2013, approximately 3.1 million shares of Company common stock remained available for grants under the Plan.
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.
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 2013, 2012 and 2011 is as
follows:
2013
2012
2011
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,000
(20,250)
(29,500)
$4.99
$4.03
$4.04
1,147,426
(527,801)
(491,625)
$6.10
$8.19
$4.14
1,968,892
(445,816)
(375,650)
$6.00
$5.38
$6.44
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . .
78,250
$5.60
128,000
$4.99
1,147,426
$6.10
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note Q—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, 2013 under the Company’s stock option plans:
$0.00—$4.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5.00—$5.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6.00—$6.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding Options
Exercisable Options
Weighted
Average
Exercise
Price
$4.70
$5.74
$6.08
Weighted
Average
Remaining
Contractual
Life (yrs)
1.30
0.6
2.1
Weighted
Average
Exercise
Price
$4.70
$5.74
$6.08
Number
11,750
62,500
4,000
Number
11,750
62,500
4,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,250
$5.60
0.8
78,250
$5.60
A summary of the Company’s restricted stock activity and related information for the years ended November 30, 2013, 2012
and 2011 is as follows:
2013
2012
2011
Weighted
Average
Grant
Date Fair
Value
$6.86
$7.87
$7.57
$7.51
Weighted
Average
Grant
Date Fair
Value
Shares
1,076,475
385,700
(594,375)
(4,650)
$4.99
$5.73
$2.75
$5.94
Shares
863,150
330,850
(229,874)
(8,050)
Shares
1,333,650
269,675
(505,900)
(20,950)
Non-vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested at end of year
. . . . . . . . . . . . . . . . . .
956,076
$7.03
863,150
$6.86
1,076,475
Weighted
Average
Grant
Date Fair
Value
$3.65
$7.95
$3.05
$4.80
$4.99
Compensation expense for all share-based payments, included in general and administrative expense, was $2.2 million,
$2.1 million and $1.6 million during 2013, 2012 and 2011, respectively.
As of November 30, 2013, there was $3.2 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 2013, 2012 and 2011 was $0.1 million, $1.6 million and $0.7 million,
respectively. The intrinsic value of stock options that were outstanding as of November 30, 2013, 2012 and 2011 was
$0.2 million, $0.3 million and $0.1 million, respectively.
Cash received from options exercised was $0.1 million in 2013, $2.0 million in 2012 and $2.4 million during 2011.
Note R—Business Segment Information
The Company’s two operating segments are Performance Chemicals and Engineered Surfaces. 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. Accounting policies of the segments are the same as those described in the significant
accounting policies.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance
costs, asset write-offs and work stoppage costs relating to operations. However, management excludes restructuring and severance
costs, asset write-offs and work stoppage costs when evaluating the results and allocating resources to the segments.
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note R—Business Segment Information (Continued)
Segment operating profit excludes unallocated corporate headquarters expenses, provisions for corporate headquarters
restructuring and severance, interest expense and income taxes. Corporate headquarters expense includes the cost of providing
and maintaining the corporate headquarters functions, including salaries, rent, travel and entertainment expenses, depreciation,
utility costs, outside services and amortization of deferred financing costs.
For a discussion of segment performance, refer to Segment Discussion in Item 7., Management’s Discussion and Analysis of
Financial Condition and Results of Operations starting on page 21 of this Annual Report on Form 10-K.
In 2013, segment operating profit for the Engineered Surfaces segment includes gain on asset sales of $5.1 million, severance
charges of $3.0 million and facility closure costs of $2.6 million, and the Performance Chemicals segment includes restructuring
and severance charges of $2.1 million, accelerated depreciation on repurposed assets of $1.0 million, asset impairment charges of
$0.2 million and a gain on asset sales of $0.3 million.
In 2012, segment operating profit for the Engineered Surfaces segment included asset impairment charges of $1.0 million,
severance charges of $1.0 million and $0.4 million of charges related to the Mafcote lawsuit (see Note P—Contingencies and
Commitments).
In 2011, segment operating profit for the Performance Chemicals segment includes the margin impact of $2.7 million for the
fair value charge of inventory acquired in the ELIOKEM acquisition, $0.9 million for a customer trade accounts receivable
allowance and $1.1 million for restructuring and severance costs. The 2011 Engineered Surfaces segment operating loss includes
asset impairment charges of $3.1 million, restructuring, severance and plant closure costs of $0.9 million, a tax indemnification
adjustment of $0.2 million and a pension plan curtailment charge of $0.1 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 from continuing operations before income taxes.
2013
2012
2011
(Dollars in millions)
Net Sales
Performance Chemicals
Performance Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 272.2
500.8
$ 343.2
521.3
$ 399.3
552.6
Total Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
773.0
864.5
951.9
Engineered Surfaces
Coated Fabrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laminates and Performance Films . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 108.9
136.2
$ 117.0
144.0
$ 114.3
134.9
Total Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245.1
261.0
249.2
Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,018.1
$1,125.5
$1,201.1
Segment Operating Profit (Loss)
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total segment operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
64.1
15.6
79.7
(31.9)
(19.8)
—
(1.5)
89.6
3.8
93.4
(36.5)
(20.0)
—
—
86.5
(1.3)
85.2
(38.0)
(13.8)
(2.3)
(1.0)
Income From Continuing Operations Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . .
$
26.5
$
36.9
$
30.1
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note R—Business Segment Information (Continued)
Total Assets
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Expenditures
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and Amortization
Performance Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineered Surfaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
2013
2012
2011
(Dollars in millions)
$547.6
129.4
177.7
—
$542.6
136.6
194.5
—
$563.5
138.5
146.5
16.6
$854.7
$873.7
$865.1
$ 22.8
5.1
1.0
$ 24.4
7.0
1.4
$ 17.9
6.0
.2
$ 28.9
$ 32.8
$ 24.1
$ 26.3
7.0
.3
$ 24.1
7.6
.3
$ 24.6
8.5
.4
$ 33.6
$ 32.0
$ 33.5
2013
2012
2011
(Dollars in millions)
$ 592.2
4.8
216.5
204.6
$ 685.4
8.0
226.8
205.3
$ 731.5
11.0
260.6
198.0
$1,018.1
$1,125.5
$1,201.1
$
$
$
54.7
8.6
16.4
68.1
16.5
8.8
63.2
23.5
(1.5)
$
79.7
$
93.4
$
85.2
$ 408.5
290.3
155.9
$ 389.6
296.5
187.6
$ 428.1
255.6
181.4
$ 854.7
$ 873.7
$ 865.1
$ 110.0
61.1
55.4
$ 110.1
56.9
55.8
$ 105.4
60.2
55.1
$ 226.5
$ 222.8
$ 220.7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note S—Financial Instruments and Fair Value Measurements
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 Company uses the
market approach and the income approach to value assets and liabilities as appropriate.
The following financial assets and liabilities were measured at fair value on a recurring basis during 2013:
Fair Value Measurements
Financial Assets
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value
Level 1
Level 2
Level 3
(Dollars in Millions)
$4.0
$4.0
$— $— $4.0
$— $— $4.0
The Company considers the recognized book value of current financial assets and liabilities, which includes cash and deposits
at financial institutions, trade receivables, trade payables and short-term amounts due banks to be reflective of fair value due to the
short-term nature of these items.
The Notes receivable relate to the sale of the European wallcovering business and the land, building and equipment of the
Columbus, Mississippi facility. The value of the notes receivable are based on estimated future cash flows associated with the note
as well as giving consideration to the credit risk of the issuer and other unobservable inputs for similar assets, and accordingly, is
classified as a Level 3 input. The notional amount of the note receivable relating to the sale of the European wallcovering business
is $3.8 million and is secured by a first lien on the building owned by the sold business. The notional amount of the note receivable
from the sale of the Columbus, Mississippi assets is $2.5 million and is secured by a first lien on the land and building that was
sold.
The fair value of the Company’s debt at November 30, 2013 approximated $466.0 million, which is higher than the carrying
value as a result of prevailing market rates on the Company’s debt.
Note T—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 Solutions Inc.’s existing and future 100% owned domestic subsidiaries that from time to time guarantee obligations
under the Company’s Senior Notes, with certain exceptions (the “Guarantors”). These exceptions include automatic release under
customary circumstances such as the sale of the subsidiary Guarantor or substantially all of its assets, the designation of the
subsidiary Guarantor as unrestricted in accordance with the provisions of the Senior Notes, and the release of the subsidiary’s
guarantee under the credit facility. Presented below are the condensed financial statements of OMNOVA Solutions (“Parent”) as
borrower, its combined Guarantor subsidiaries and its combined Non-Guarantor subsidiaries. The separate financial information
of subsidiary guarantors of indebtedness for prior periods have been adjusted to reflect discontinued operations. The income (loss)
of the Company’s subsidiary guarantors and non-guarantors in these condensed consolidating statements of operations are
presented under the equity method for purpose of this disclosure only.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2013
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$658.1
522.9
$ —
—
$392.6
314.5
$(32.6)
(32.0)
$1,018.1
805.4
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance cost write-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Income) loss from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135.2
81.6
17.8
(1.8)
4.6
.2
25.8
1.5
(11.3)
(6.1)
Total costs and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112.3
Income (loss) from continuing operations before income taxes . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . .
22.9
2.4
20.5
(.9)
—
.5
—
—
—
—
(1.8)
—
(13.4)
(.7)
(15.4)
15.4
3.4
12.0
—
78.1
36.0
15.8
(3.1)
2.5
—
7.9
—
—
5.4
64.5
13.6
.2
13.4
—
(.6)
—
—
—
—
—
—
—
24.7
.1
24.8
(25.4)
—
(25.4)
—
212.7
118.1
33.6
(4.9)
7.1
.2
31.9
1.5
—
(1.3)
186.2
26.5
6.0
20.5
(.9)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 19.6
$ 12.0
$ 13.4
$(25.4)
$
19.6
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2012
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$749.7
601.2
$ —
—
$407.7
328.5
$(31.9)
(31.4)
$1,125.5
898.3
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Income) loss from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net
148.5
84.0
16.2
1.0
.8
29.8
(5.6)
(3.7)
—
.9
—
—
—
(1.9)
(8.3)
(.8)
Total costs and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
122.5
(10.1)
Income (loss) from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . .
26.0
3.3
22.7
4.9
10.1
3.1
7.0
(.9)
79.2
36.3
15.8
—
.2
8.8
—
2.9
64.0
15.2
4.8
10.4
(2.1)
(.5)
—
—
—
—
(.2)
13.9
.2
13.9
(14.4)
—
(14.4)
—
227.2
121.2
32.0
1.0
1.0
36.5
—
(1.4)
190.3
36.9
11.2
25.7
1.9
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27.6
$ 6.1
$ 8.3
$(14.4)
$
27.6
78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Operations For the Year Ended November 30, 2011
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$790.5
653.2
$ —
—
$431.1
349.5
$(20.5)
(20.2)
$1,201.1
982.5
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sale of asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing fees write-off . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (income) from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137.3
71.8
16.4
—
.6
.7
30.8
1.0
4.4
2.3
(4.5)
Total costs and other expenses . . . . . . . . . . . . . . . . . . . . . . .
123.5
Income (loss) from continuing operations before income taxes . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . .
13.8
11.0
2.8
(5.6)
—
1.2
—
—
—
—
(1.4)
—
10.0
—
(.8)
9.0
(9.0)
(4.0)
(5.0)
1.4
81.6
35.6
17.1
1.2
1.0
2.4
8.2
—
—
—
4.4
69.9
11.7
6.4
5.3
(15.3)
(.3)
—
—
—
—
—
.4
—
(14.4)
—
.1
(13.9)
13.6
—
13.6
—
218.6
108.6
33.5
1.2
1.6
3.1
38.0
1.0
—
2.3
(.8)
188.5
30.1
13.4
16.7
(19.5)
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2.8)
$ (3.6)
$ (10.0)
$ 13.6
$
(2.8)
Condensed Consolidating Statements of Comprehensive Income (Loss) For the Year Ended November 30, 2013
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . . . .
$19.6
26.1
$12.0
17.1
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45.7
$29.1
$13.4
5.1
$18.5
Eliminations
Total
$(25.4)
(22.2)
$19.6
26.1
$(47.6)
$45.7
Condensed Consolidating Statements of Comprehensive Income (Loss) for the Year Ended November 30, 2012
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . .
$ 27.6
(24.4)
$ 6.1
(1.3)
$ 8.3
(4.6)
$(14.4)
5.9
$27.6
(24.4)
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3.2
$ 4.8
$ 3.7
$ (8.5)
$ 3.2
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Comprehensive Income (Loss) for the Year Ended November 30, 2011
(Dollars in millions)
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
Net (loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . . . .
$(2.8)
(2.8)
$ (3.6)
(7.9)
$(10.0)
2.5
$13.6
5.4
$(2.8)
(2.8)
Comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(5.6)
$(11.5)
$ (7.5)
$19.0
$(5.6)
Condensed Consolidating Statements of Financial Position November 30, 2013
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
$102.1
—
56.9
45.6
6.2
6.8
217.6
110.1
76.9
46.9
357.8
111.8
12.0
$ —
—
—
—
—
—
—
—
—
—
42.8
194.6
3.8
$ 62.8
—
66.2
44.1
2.8
10.3
186.2
116.4
85.6
7.1
164.3
—
.9
$ — $164.9
—
—
— 123.1
88.1
8.4
17.6
(1.6)
(.6)
.5
(1.7)
402.1
— 226.5
— 162.5
46.9
—
—
16.7
(7.1)
(564.9)
(306.4)
—
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$933.1
$241.2
$560.5
$(880.1) $854.7
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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.0
38.4
14.5
2.1
—
2.0
59.0
444.0
6.5
55.2
—
182.9
7.5
755.1
178.0
$ —
.2
—
—
—
.6
.8
—
—
—
—
127.4
—
128.2
113.0
$ 2.6
53.5
5.9
—
.6
—
62.6
—
—
12.0
30.4
259.4
1.5
365.9
194.6
$ — $ 4.6
92.1
20.4
2.1
—
7.5
—
—
—
(.6)
4.9
4.3
126.7
— 444.0
6.5
—
67.2
—
23.3
(7.1)
—
(569.7)
9.0
—
(572.5)
(307.6)
676.7
178.0
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . .
$933.1
$241.2
$560.5
$(880.1) $854.7
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Financial Position November 30, 2012
(Dollars in millions)
ASSETS:
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes—current
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes—non-current . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
$ 98.7
5.5
68.8
45.7
7.2
6.3
232.2
110.2
89.8
67.0
364.3
91.9
1.1
$ —
—
—
—
—
—
—
—
—
—
40.9
172.6
3.8
$ 44.3
—
61.3
51.6
4.0
8.5
169.7
112.6
87.8
6.1
473.3
—
2.4
$
— $143.0
—
5.5
— 130.1
96.2
10.7
14.8
(1.1)
(.5)
—
(1.6)
400.3
— 222.8
— 177.6
65.7
—
—
7.3
(7.4)
(878.5)
(264.5)
—
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$956.5
$217.3
$851.9
$(1,152.0) $873.7
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—non-current . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.0
54.2
16.4
2.1
—
9.1
83.8
442.6
7.7
99.2
—
183.4
9.6
826.3
130.2
$ —
.2
—
—
—
2.7
2.9
—
—
—
—
141.3
—
144.2
73.1
$ 7.6
48.6
5.4
—
.6
3.2
65.4
—
—
12.2
31.3
567.7
2.7
679.3
172.6
$
— $ 9.6
102.8
(.2)
21.8
—
2.1
—
—
(.6)
9.2
(5.8)
(6.6)
145.5
— 442.6
—
7.7
— 111.4
23.9
—
12.4
(7.4)
(892.4)
.1
(906.3)
(245.7)
743.5
130.2
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . .
$956.5
$217.3
$851.9
$(1,152.0) $873.7
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2013
(Dollars in millions)
Operating Activities
Net Cash Provided By (Used In) Operating Activities . . . . . . . . . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance settlements . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used in) Investing Activities . . . . . . . . . . . . .
Financing Activities
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from exercise of stock options . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . .
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
$ 23.0
$ 1.4
$ 24.8
$(3.4)
$ 45.8
(12.8)
—
(5.2)
1.7
(16.3)
(2.0)
—
—
(.6)
5.5
.1
—
3.0
(6.3)
—
—
(8.5)
—
(8.5)
—
—
—
—
—
—
8.5
8.5
(1.4)
—
—
(16.1)
.2
—
5.0
(10.9)
(3.4)
34.9
(39.4)
—
—
—
8.6
.7
3.9
18.5
44.3
—
—
13.7
—
13.7
3.4
—
—
—
—
—
(17.1)
(13.7)
3.4
—
—
(28.9)
.2
—
6.7
(22.0)
(2.0)
34.9
(39.4)
(.6)
5.5
.1
—
(1.5)
(.4)
21.9
143.0
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . .
3.4
98.7
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . .
$102.1
$ —
$ 62.8
$ —
$164.9
82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2012
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
$ 55.2
$ 3.9
$ 8.0
$(1.8)
$ 65.3
(Dollars in millions)
Net Cash Provided By (Used In) Operating Activities . . . . . . . . . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of business and asset sales . . . . . . . . . . . . . . . . .
Investment in subsidiary and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used in) Investing Activities . . . . . . . . . . . . .
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from exercise of stock options . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . .
(20.1)
12.7
(3.4)
(10.8)
—
(2.0)
—
—
(1.3)
2.0
—
(1.3)
.5
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . .
43.6
55.1
—
—
1.1
1.1
—
—
—
—
—
—
—
—
(5.0)
—
—
(12.7)
—
—
(12.7)
3.4
—
43.8
(45.4)
—
—
(1.1)
.7
4.5
.5
43.8
—
—
2.3
2.3
(3.4)
—
—
—
—
—
1.1
(2.3)
1.8
—
—
(32.8)
12.7
—
(20.1)
—
(2.0)
43.8
(45.4)
(1.3)
2.0
—
(2.9)
1.8
44.1
98.9
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . .
$ 98.7
$ —
$ 44.3
$ —
$143.0
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note T—Separate Financial Information of Subsidiary Guarantors of Indebtedness (Continued)
Condensed Consolidating Statements of Cash Flows Year Ended November 30, 2011
(Dollars in millions)
Net Cash Provided By (Used In) Operating Activities . . . . . . . . . . . . .
Investing Activities
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of business, less cash received . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in (Provided by) Investing Activities . . . . . . . . . . . . . .
Financing Activities
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from exercise of stock options . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . .
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . .
OMNOVA
Solutions
(Parent)
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Total
$ (31.3)
$ (1.0)
$ 177.2
$(129.2)
$15.7
(13.9)
(21.5)
—
253.2
(218.6)
(.4)
—
—
—
—
(139.2)
—
(10.2)
(250.1)
1.0
—
—
(.2)
—
(24.1)
— (271.6)
1.0
—
— 253.2
—
(.6)
357.8
—
(1.2)
(139.2)
(259.5)
357.8
(42.1)
199.2
(144.0)
—
—
(15.5)
(4.2)
2.4
—
37.9
.1
5.5
49.6
—
—
—
—
—
—
—
140.6
140.6
(.4)
—
—
103.1
—
96.5
(95.1)
—
—
—
(10.0)
94.5
10.0
22.2
21.6
(103.1)
199.2
— (144.0)
96.5
—
(95.1)
—
(15.5)
—
(4.2)
—
2.4
—
—
(130.6)
(233.7)
5.1
—
—
39.3
14.8
27.7
71.2
Cash and Cash Equivalents at End of Period . . . . . . . . . . . . . . . . . . .
$ 55.1
$ — $ 43.8
$ — $98.9
84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
OMNOVA SOLUTIONS INC.
Quarterly Financial Data (Unaudited)
2013
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit(1)(2)
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments and write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs write-off
Income from continuing operations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income per share from continuing operations(4)
Three Months Ended
February 28
May 31
August 31
November 30
(Dollars in millions, except per share amounts)
$261.2
$270.8
$251.7
$ 54.7
$ 57.3
$ 49.0
$
$ 1.4
$ 4.6
.8
$ — $ — $ (1.8)
$ — $ — $ —
$ —
$ — $ 1.5
$ 9.0
$ 2.6
$
$ —
$
$
.3
$ 9.0
$ 2.9
$
.2
(.4)
(.2)
$234.4
$ 51.7
$
.3
$ (3.1)
$
.2
$ —
$ 8.7
$
(.8)
$ 7.9
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ .06
$ — $ .06
$ .19
$ .19
$ .19
$ .19
Net income per share(3)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock price range per share—high . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ .06
$ — $ .06
$ 8.41
$ 8.54
$ 6.40
$ 6.77
$ .19
$ .19
$ 8.68
$ 7.41
$ .17
$ .17
$ 9.02
$ 7.85
2012
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit(1)(2)
Restructuring and severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments and write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income per share from continuing operations(4)
Three Months Ended
February 29
May 31
August 31
November 30
(Dollars in millions, except per share amounts)
$288.2
$307.5
$275.9
$ 57.8
$ 60.0
$ 60.9
.3
.3
$
$
$
.5
(.1)
(.1) $
$ — $
$ —
.2
$ — $
$ 6.9
$ 6.9
$ 10.7
$
$
$ 2.8
(.5)
.1
$ 6.4
$ 7.0
$ 13.5
$253.9
$ 48.5
(.1)
$
.2
$
$
.8
$ 1.2
(.5)
$
.7
$
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .23
$ .23
$ .15
$ .15
$ .14
$ .14
$ .02
$ .02
Net income per share(3)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock price range per share—high . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ .29
$ .29
$ 5.61
$ 4.00
$ .15
$ .15
$ 7.84
$ 5.18
$ .14
$ .14
$ 8.17
$ 6.45
$ .01
$ .01
$ 8.83
$ 6.20
(1) Gross profit excludes depreciation expense. Depreciation expense related to manufacturing facilities and equipment was
$5.3 million, $5.4 million, $5.6 million and $5.9 million for the three months ended February 28, 2013, May 31, 2013,
August 31, 2013 and November 30, 2013, and $5.7 million, $5.8 million, $5.8 million and $6.1 million for the three months
ended February 29, 2012, May 31, 2012, August 31, 2012 and November 30, 2012, respectively.
includes net LIFO inventory reserve adjustments of $0.9 million of
income and
$1.8 million of income for the three months ended May 31, 2013, August 31, 2013 and November 30, 2013, respectively,
income, $3.5 million of
(2) Gross profit
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
and $0.9 million of expense, $0.1 million of expense, $0.8 million of income and $2.5 million of expense for the three months
ended February 29, 2012, May 31, 2012, August 31, 2012, and November 30, 2012, respectively.
Income from continuing operations and net income for the three months ended November 30, 2013 includes $1.5 million of
tax benefits from sold operations and $1.0 million of benefits related to tax audit settlements in foreign jurisdictions.
(3)
(4) 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.
86
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
the Company’s disclosure controls and procedures as of November 30, 2013. Based on its evaluation,
effectiveness of
management has determined that the Company’s disclosure controls and procedures are effective. Further, during the quarter
ended November 30, 2013, 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 35 and 36 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 2014 Annual Meeting of
Shareholders is set forth on pages 6 and 7 of the Company’s 2014 Proxy Statement and is incorporated herein by reference.
Information with respect to directors of the Company whose terms extend beyond the 2014 Annual Meeting of Shareholders is set
forth on pages 8 through 11 of the Company’s 2014 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 19 of the Company’s 2014 Proxy Statement and is incorporated herein by reference. Also see Executive Officers of
the Registrant on pages 17 and 18 of this Report.
Information regarding the Company’s Audit Committee and its Audit Committee Financial Expert is set forth on pages 17 and
18 of the Company’s 2014 Proxy Statement and is incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Exchange Act of 1934, as amended, is set forth on page 75
of the Company’s 2014 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 24 through 71 of the Company’s 2014 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 72 through 74 of
the Company’s 2014 Proxy Statement and is incorporated herein by reference.
87
Equity Compensation Plan Information
The following table sets forth certain information as of November 30, 2013, regarding the only equity compensation plan
maintained by the Company on that date, the Third Amended and Restated 1999 Equity and Performance Incentive Plan. This plan
has been approved by the Company’s shareholders.
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
issuance under equity
compensation plans
Equity compensation plans approved by security holders . . . . . . . . .
Equity compensation plans not approved by security holders . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
994,037
N/A
994,037
$5.60
N/A
$5.60
3,060,848
N/A
3,060,848
Item 13.
Certain Relationships and Related Transactions, Director Independence
Information regarding certain relationships and related transactions and director independence is set forth on pages 22 and
23 of the Company’s 2014 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, 2013 and 2014, 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 2014 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, 2013, 2012 and 2011
Consolidated Statements of Comprehensive Income for the years ended November 30, 2013, 2012 and 2011
Consolidated Balance Sheets at November 30, 2013 and 2012
Consolidated Statements of Shareholders’ Equity for the years ended November 30, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended November 30, 2013, 2012 and 2011
Notes to the Consolidated Financial Statements
(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.
88
EXHIBIT INDEX
(a)(3) Exhibits
Exhibit
Description
2.1
3.2**
3.4**
4.1
10.3†
10.5†
10.6†
10.7†
10.8†
10.9†
10.11†
10.12†
10.13
10.14†
10.22†
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)).
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 Third Amended and Restated 1999 Equity and Performance Incentive Plan, (incorporated by
reference to Appendix C to the Company’s 2012 Proxy Statement filed with the Securities and Exchange Commission
on February 3, 2012 (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)).
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 19, 2012
(incorporated by reference to Appendix B to the Company’s 2012 Proxy Statement filed with the Securities and
Exchange Commission on February 3, 2012 (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)).
89
Exhibit
Description
10.23†
10.24†
10.26†
10.30
10.32
10.33
10.34
12.1
21.1
23.1
24.1
31.1
31.2
32.1
101
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, 2012 (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, 2011 (File No. 1-15147)).
OMNOVA Solutions Executive Incentive Compensation, as amended and restated effective January 19, 2012
(incorporated by reference to Appendix A to the Company’s 2012 Proxy Statement filed with the Securities and
Exchange Commission on February 3, 2012 (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 (incorporated by reference to the same numbered exhibit to the
Company’s Annual Report on Form 10-K for the year ended November 30, 2010 (File No. 1-15147)).
Second Amended and Restated Senior Secured Credit Facility 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
JPMorgan Chase Bank N.A., as agent for the Lenders (incorporated by reference to the same numbered exhibit to the
Company’s Annual Report on Form 10-K for the year ended November 30, 2010 (File No. 1-15147)).
Amendment dated March 7, 2013, to 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.
Amendment dated April 5, 2013, to Second Amended and Restated Credit Agreement dated as of December 9,
2010, by and among OMNOVA Solutions Inc., as Borrower, the financial institutions party thereto, as Lenders, and
JP Morgan Chase Bank, N.A., as agent for the Lenders.
Computation of Ratio of earnings to fixed charges.
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, L. B. Porcellato, A. R. Rothwell, 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 following financial information from our Annual Report on Form 10-K for 2013, filed with the SEC on January
24, 2014, formatted in XBRL: (i) the Consolidated Statements of Operations for the years ended November 30, 2013,
2012 and 2011; (ii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended November 30,
2013, 2012 and 2011; (iii) the Consolidated Balance Sheets at November 30, 2013 and 2012; (iv) the Consolidated
Statements of Shareholders’ Equity for the years ended November 30, 2013, 2012 and 2011; (v) the Consolidated
Statements of Cash Flows for the years ended November 30, 2013, 2012 and 2011; and (vi) the Notes to the
Consolidated Financial Statements.
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.
90
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, 2014
OMNOVA SOLUTIONS INC.
By /s/ J. C. LEMAY
J. C. LeMay
Senior Vice President,
Corporate 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, 2014
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, 2014
Officer
Director
Director
Director
Director
Director
Director
Director
91
January 24, 2014
January 24, 2014
January 24, 2014
January 24, 2014
January 24, 2014
January 24, 2014
January 24, 2014
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FINANCIAL HIGHLIGHTS Years Ended November 30,(Dollars in millions, except per share data)201320122011NET SALESPerformance Chemicals $ 773.0 $ 864.5 $ 951.9 Engineered Surfaces 245.1 261.0 249.2 $ 1,018.1 $ 1,125.5 $ 1,201.1 SEGMENT OPERATING PROFIT (LOSS)Performance Chemicals $ 64.1 $ 89.6 $ 86.5 Engineered Surfaces 15.6 3.8 (1.3) Interest expense (31.9) (36.5) (38.0)Corporate expenses (19.8) (20.0) (17.1)Deferred financing fees write-off (1.5) — —Income tax expense (6.0) (11.2) (13.4)Income from continuing operations 20.5 25.7 16.7 Income (loss) from discontinued operations, net of tax (0.9) 1.9 (19.5)NET INCOME (LOSS) $ 19.6 $ 27.6 $ (2.8) INCOME PER SHARE – DILUTEDIncome per share – continuing operations $ 0.44 $ 0.56 $ 0.37 Income (loss) per share – discontinued operations, net of tax (0.02) 0.04 (0.43)Net income (loss) per share – diluted $ 0.42 $ 0.60 $ (0.06) OTHER DATACapital expenditures $ 28.9 $ 32.8 $ 24.1 Depreciation and amortization $ 33.6 $ 32.0 $ 33.5 Number of employees at year-end 2,300 2,390 2,300 PERFORMANCE CHEMICALS Value-added emulsion polymers and specialty chemicals used in coatings, adhesives, binders and other applicationsENGINEERED SURFACESFunctional laminate and coated fabric surfaces for transportation, furnishings, new construction and refurbishmentREVENUES35%21%19%10%9%6%Refurbishment and New ConstructionTransportationPaper andPackagingIndustrial/OtherPersonal HygieneOil & Gas Design by Dix & Eaton OfficersKEVIN M. MCMULLENChairman, Chief Executive Officer and PresidentMICHAEL E. HICKSSenior Vice President and Chief Financial OfficerMICHAEL A. QUINNSenior Vice President and Chief Human Resources Officer JAMES C. LEMAYSenior Vice President, Corporate Development; General CounselDOUGLAS E. WENGERSenior Vice President and Chief Information OfficerCHESTER W. FOXVice President, Treasurer JAMES J. HOHMANVice President; President, Performance ChemicalsDAVID H. MAYNARDPresident, Engineered SurfacesJAY T. AUSTINVice President, Global Sourcing and LogisticsKRISTINE C. SYRVALINVice President, Human Resources Administration; Assistant General Counsel and SecretaryShareholder InformationNYSE ANNUAL CEO CERTIFICATIONThe annual CEO certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual was submitted by Kevin M. McMullen without qualification on April 19, 2013.TRANSFER AGENT AND REGISTRARComputershare 1-866-220-6360 1-201-680-6578 (outside U.S. and Canada) 1-800-952-9245 (hearing impaired)Address shareholder inquiries to: OMNOVA Solutions c/o Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 or 250 Royall St. Canton, MA 02021 (overnight delivery/private couriers/ registered mail)Questions and inquiries: www.computershare.com BUYDIRECTBuyDIRECT is a direct purchase, sale and dividend reinvestment plan available to shareholders and interested first-time investors. It offers a convenient method of 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 Computershare at 1-866-220-6360.COMMON STOCK LISTINGNew York Stock Exchange Ticker Symbol: OMNANNUAL MEETING OF SHAREHOLDERSMarch 19, 2014 at 9:00 a.m. Hilton Akron – Fairlawn 3180 West Market Street Fairlawn, OH 44333INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMErnst & Young LLP Akron, OHSHAREHOLDER SERVICES1-800-735-5160INVESTOR RELATIONS CONTACTMichael E. Hicks Senior Vice President and Chief Financial Officer 330-869-4411OMNOVA SOLUTIONS FOUNDATION175 Ghent Road Fairlawn, OH 44333-3300 330-869-4289COMMUNICATIONSGeneral inquiries: Corporate Communications 330-869-4200 information@omnova.com Investor packets: 330-869-4411 ar_requests@omnova.com INTERNET WEBSITEwww.omnova.comOMNOVA Solutions is an equal opportunity employer. CORPORATE INFORMATIONBoard of DirectorsDAVID J. D’ANTONI 2Retired Senior Vice President and Group Operating Officer, Ashland Inc.KEVIN M. MCMULLEN 3Chairman, Chief Executive Officer and President, OMNOVA Solutions Inc.MICHAEL J. MERRIMAN 2,3,4Operating Advisor, Resilience Capital Partners LLCSTEVEN W. PERCY 1,3Retired Chairman and Chief Executive Officer, BP America Inc.LARRY PORCELLATO 2Chief Executive Officer, The Homax Group, Inc.ALLAN R. ROTHWELL 1Retired Executive Vice President, Eastman Chemical CompanyWILLIAM R. SEELBACH 2Senior Advisor, The Riverside CompanyROBERT A. STEFANKO 1Retired Chairman and Executive Vice President – Finance and Administration, A. Schulman, Inc.COMMITTEES1 Audit Committee Chairman: Steven W. Percy2 Compensation and Corporate Governance Committee Chairman: Michael J. Merriman 3 Executive Committee Chairman: Kevin M. McMullen4 Presiding DirectorDIRECTORS & OFFICERS PAPER STOCK: The cover and inside glossy pages of this report are printed using vegetable-based inks on paper coated with OMNOVA’s GenCryl® latex.45098_Cover_Wt.indd 21/28/14 5:30 PM All trademarks – OMNOVA Solutions © 2014 OMNOVA Solutions Inc.OMNOVA SOLUTIONS175 GHENT ROAD, FAIRLAWN, OH 44333330.869.4200WWW.OMNOVA.COM 2013 ANNUAL REPORT AND 10KENERGIZEDENERGIZED OMNOVA SOLUTIONS 2013 ANNUAL REPORT45098_Cover_Wt.indd 11/28/14 5:30 PM