OMNOVA Solutions reports second quarter 2011 results

FAIRLAWN, OH -- OMNOVA Solutions Inc. today announced Net Income of $6.2 million, or $0.14 Diluted Earnings Per Share, for the second quarter ended May 31, 2011. This compares to Net Income of $15.1 million, or Diluted Earnings Per Share of $0.33 for the second quarter of 2010. In the second quarter of 2011, there were a number of non-recurring charges totaling $1.1 million resulting primarily from the acquisition of specialty chemicals producer ELIOKEM. Excluding these items, Adjusted Net Income for the second quarter of 2011 was $7.3 million, with Adjusted Diluted Earnings Per Share of $0.16, as compared to the Adjusted Pro Forma Net Income of $12.8 million or $0.29 per diluted share for the second quarter of 2010. The Adjusted Net Income for the second quarter of 2011 also includes, net of tax, unrecovered raw material costs of $2.4 million, lower margin on weaker volumes of $ 2.2 million, foreign exchange currency losses of $1.8 million and new plant start-up costs of $0.3 million. The Diluted Earnings Per Share impact of these items was approximately $(0.14).

"The Company faced stiff headwinds in the second quarter with record high raw material costs, weaker demand in certain end-use markets and start-up costs for a new plant in China," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer. "In the face of these market challenges, our second quarter results, while below our prior expectations, reflect the Company's improved, more robust and global business model. The integration of ELIOKEM has added numerous innovative products, expanded our penetration into new and adjacent markets and accelerated the globalization of our business."

Consolidated Results for the Quarter Ending May 31, 2011 – Net sales increased $103.5 million, or 45.7%, to $329.9 million for the second quarter of 2011, compared to $226.4 million for the second quarter of 2010. The sales improvement was driven by $94.8 million of revenues from the ELIOKEM acquisition, and increased OMNOVA legacy sales of $8.7 million. The higher OMNOVA legacy sales resulted from price increases of $22.5 million and $3.0 million of favorable currency translation effects which were partially offset by volume decreases of $16.8 million.

Gross profit in the second quarter of 2011 increased to $65.1 million, compared to $47.2 million in the second quarter of 2010, primarily due to the ELIOKEM acquisition. Raw material costs in OMNOVA's legacy business increased $26.3 million in the second quarter versus the same period last year. Gross profit margins in the second quarter of 2011 were 19.7%, compared to margins of 20.8% in the second quarter of 2010. The decline in gross profit margin percentage was due primarily to the significant raw material inflation; the effect of Performance Chemicals index pricing in which higher raw material costs are passed to customers, subject to a contractual time lag, with no gross margin benefit; new plant start-up costs; and changes in product mix.
Selling, general and administrative expenses (SG&A) in the second quarter of 2011 increased to $34.3 million, or 10.4% of sales, compared to $25.6 million, or 11.3% of sales, in the second quarter of 2010. The increase of $8.7 million in SG&A was primarily due to the ELIOKEM acquisition. The decline as a percentage of sales was due to higher sales and the Company's focused ongoing efforts to control costs and to leverage SG&A across its global operations and growing revenue base.

Interest expense in the second quarter of 2011 was $9.6 million, an increase of $7.7 million from the second quarter of 2010, due to higher borrowing levels and an increase in interest rates resulting from the refinancing of the Company to facilitate the ELIOKEM acquisition.

In the quarter, ELIOKEM acquisition and integration related expenses were $0.8 million and restructuring and severance expenses were $0.7 million.
For the second quarter of 2011, income tax expenses increased to $3.5 million, a 36% effective income tax rate, as compared to $0.9 million and a 6% effective tax rate in the second quarter of 2010. Minimal taxes were provided in last year's second quarter due to the existence of a deferred tax asset valuation allowance in the U.S. which was reversed in the fourth quarter of 2010 because of an improvement in the Company's earnings outlook. The 2010 reversal of the valuation allowance resulted in the Company recognizing higher tax expense in 2011 as compared to the second quarter of 2010. Global cash taxes are expected to be minimal as the Company has $118.9 million of U.S. federal net operating loss carryforwards and $109.2 million of state and local tax net operating loss carryforwards with expiration dates between 2021 and 2031.

As of May 31, 2011, the Company's debt of $457.2 million was comprised of $250.0 million of 7.875% Senior Notes maturing in 2017, a term loan of $197.2 million maturing in 2016 and $10.0 million of foreign borrowings. Cash and cash equivalents totaled $79.5 million. There were no outstanding borrowings under the Company's U.S. revolving asset-based credit facility and the available borrowing capacity was $94.9 million.

Performance Chemicals - Net sales during the second quarter of 2011 increased $106.9 million, to $245.5 million, compared to $138.6 million in the second quarter of 2010. The ELIOKEM acquisition added $94.8 million of sales versus the prior year. Performance Chemicals' legacy business sales improvement of $12.1 million in the second quarter of 2011 was due to pricing increases of $17.8 million and $0.6 million of foreign currency translation effects partially offset by volume decreases of $6.3 million. Segment Operating Profit was $23.9 million for the second quarter of 2011 as compared to $26.7 million in the second quarter of 2010, a decrease of $2.8 million.

Performance Chemicals Adjusted Segment Operating Profit for the second quarter of 2011 was $24.2 million, excluding $0.3 million of restructuring and severance, compared to the second quarter pro forma 2010 amount of $29.7 million. The adjusted operating profit margin was 9.9% for the second quarter of 2011, compared to the pro forma adjusted operating profit margin of 13.9% in the second quarter of 2010. The adjusted operating profit margin declined due to higher raw material costs; the effect of the index pricing in which higher raw material costs are passed to customers, subject to a contractual time lag, with no gross margin benefit; plant start-up costs, and changes in product mix.

The former ELIOKEM product lines are now being managed on an integrated global basis while offering highly focused local customer service and applications support. The Company is focused on significant cost and revenue synergy opportunities in specialty coatings, specialty latices and oil field chemicals, supported by strong product and application development centers in Europe, North America and Asia.

Decorative Products – Net sales were $84.4 million during the second quarter of 2011, a decrease of $3.4 million, or 3.9%, compared to the second quarter of 2010. Sales as compared to last year improved in global wallcovering and decorative laminates but declined in global coated fabrics and performance films. In total, volume declines, primarily related to the China coated fabric and domestic performance film product lines, were $10.5 million in the quarter. These were partially offset by price increases of approximately $4.7 million and favorable foreign exchange impact of $2.4 million. Adjusted Segment Operating results were breakeven in the second quarter of 2011, compared to Pro Forma Adjusted Segment Operating Profit of $2.4 million for the second quarter of 2010. However, this is an improvement from the Adjusted Segment Operating Loss of $1.7 million in the first quarter of 2011. The major contributors to the year-over-year operating profit decline were the reduction in sales volumes and increased raw material costs. Higher raw material costs of approximately $5.6 million were partially offset by price increases of $4.7 million, or an 84% recovery. Price recovery continued to improve throughout the quarter.

The Laminates product line generated sales increases of over 13% compared to a year ago and was profitable during the quarter. North American wallcovering generated higher year-over-year sales for the third consecutive quarter.

This Earnings Release includes adjusted segment operating profit (loss), adjusted net income and adjusted diluted earnings per share 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 and pro forma 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 (loss), 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.

The second quarter and year to date 2011 adjusted segment operating profit (loss), adjusted net income and adjusted diluted earnings per share excludes certain items which management does not consider to be reflective of normal operations.

The second quarter and year to date 2010 pro forma presentation reflects the pro forma results as if ELIOKEM was owned by the Company from the beginning of the year; the post-acquisition capital structure and related interest expense; the Company's estimate of an effective tax rate of 33.5%; and other adjustments related to non-operational items.

OMNOVA Solutions Inc. is a technology-based company with pro forma sales for the twelve months ending May 31, 2011 of $1.2 billion and an active global workforce of approximately 2,800. OMNOVA is an innovator of emulsion polymers, specialty chemicals, and decorative and functional surfaces for a variety of commercial, industrial and residential end uses.

SOURCE: OMNOVA Solutions Inc.

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