Omnova Solutions fiscal Q1 net income up US$11.7M to US$12.7M, sales up 1.5% to US$275.9M; paper chemical volumes lower, company focusing on higher performance and more sustainable products

Philip Goldsmith

FAIRLAWN, Ohio , March 20, 2012 (press release) –  - For the first quarter, the Company reported income from continuing operations of $10.7 million, or $0.23 per diluted share.

 - Adjusted Income from Continuing Operations for the first quarter improved 44% to $9.9 million, or $0.22 per diluted share as compared to $6.9 million or $0.15 per diluted share last year.

 - Gross profit margins improved to 22.1%, as compared to 19.2% in the first quarter of 2011.

 - Net Debt / EBITDA leverage ratio improved to 2.8x from 3.1x at year end on higher EBITDA and Net Debt reduction of approximately $21 million.

OMNOVA Solutions Inc. (NYSE: OMN) today announced income from continuing operations of $10.7 million, or $0.23 per diluted share for the first quarter ended February 29, 2012. Net income for the first quarter was $12.7 million, or $0.28 per diluted share. Included in the first quarter net income was income of $2.0 million, or $0.05 per diluted share from discontinued operations resulting from a gain on the sale of a discontinued wallcovering business of $6.0 million which was partially offset by wallcovering related operating losses and transition expenses of $4.0 million during the quarter.

"The first quarter 2012 operating profit improved versus the first quarter of last year and sequentially from the fourth quarter of 2011. First quarter raw material costs started at relatively low levels, but increased throughout the quarter. However, due to pricing actions, an improved sales mix of higher margin products, benefits from our global manufacturing footprint and continued productivity improvements, profits increased despite softness in market demand," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer. "We also generated positive cash flow during the quarter and increased our cash balance $21 million to over $124 million.

"Our improved first quarter results reflect the fundamental improvements we have made to our Company, including our globalization initiatives, expansion of our specialty chemicals capability through the ELIOKEM acquisition and a repositioning of our Decorative Products segment. Performance Chemicals achieved its best quarterly operating profit performance in history, and the integration of the ELIOKEM acquisition continues to proceed successfully and has been accretive to earnings. The Decorative Products segment, now comprised of our coated fabrics and laminate/ performance films product lines, significantly improved its profitability versus losses last year. With the divestitures of our wallcovering businesses, the Decorative Products segment is positioned to be a positive contributor to OMNOVA's future financial results," said McMullen.

Consolidated Results for the First Quarter Ending February 29, 2012
Net sales increased $4.0 million, or 1.5%, to $275.9 million for the first quarter of 2012, compared to $271.9 million for the first quarter of 2011. The sales increase was driven by improved pricing of $24.2 million to cover higher raw material costs and favorable product mix which was partially offset by volume decreases and unfavorable currency translation effects.

Gross profit in the first quarter of 2012 increased to $60.9 million, compared to $52.1 million in the first quarter of 2011, due primarily to pricing actions, favorable product mix, and productivity improvements. Raw material costs increased $13.9 million in the first quarter versus the same period last year. Gross profit margins in the first quarter of 2012 were 22.1%, compared to margins of 19.2% in the first quarter of 2011.

Selling, general and administrative expense (SG&A) in the first quarter of 2012 was $29.5 million, or 10.7% of sales, compared to $27.4 million, or 10.1% of sales, in the first quarter of 2011. The increase was due to higher employee benefits costs, information technology management system enhancements, and research and development costs.

Interest expense in the first quarter of 2012 was $9.5 million, an increase of $0.2 million from the first quarter of 2011, due to higher borrowing levels in the Company's foreign subsidiaries.
Income tax expense was $3.5 million, representing a 24.6% effective income tax rate, for the first quarter of 2012, compared to income tax expense of $2.7 million, or a 64.3% effective tax rate in the first quarter of 2011. Compared to the Company's estimated long-term effective tax rate of 39%, the lower rate in the first quarter of 2012, was primarily due to a one-time foreign tax benefit of $1.0 million and a reduction of a foreign tax valuation allowance, while the higher rate in the first quarter of 2011 was related to a one-time charge of $1.1 million resulting from the merger of ELIOKEM U.S. into OMNOVA Solutions.

Cash tax payments in the U.S. over the next few years are expected to be minimal as the Company has $124.8 million of U.S. federal net operating loss carryforwards and $109.1 million of state and local tax net operating loss carryforwards with expiration dates between 2022 and 2032.

Net income for the first quarter was $12.7 million, or $0.28 per diluted share, compared to $1.0 million, or $0.02 per diluted share for the first quarter of 2011. This included income from discontinued operations of $2.0 million for the first quarter of 2012, or $0.05 per diluted share compared to a loss of $0.5 million or a loss of $0.01 per diluted share in the first quarter of 2011. Included in the income from discontinued operations was an after tax gain on the sale of the wallcovering businesses of approximately $6.0 million offset by wallcovering related operating losses and transition expenses of $4.0 million. Income from continuing operations for the first quarter of 2012 was $10.7 million, or $0.23 per diluted share, compared to $1.5 million, or $0.03 per diluted share for the first quarter of 2011. Adjusted Income From Continuing Operations was $9.9 million, or $0.22 per diluted share for the first quarter of 2012 compared to Adjusted Income From Continuing Operations of $6.9 million, or $0.15 per diluted per share in the first quarter of 2011.

As of February 29, 2012, the Company's debt of $455.4 million was comprised of $250.0 million of 7.875% Senior Notes maturing in 2018, a term loan of $197.5 million maturing in 2017 and $9.5 million of foreign operations borrowing. The Company increased its strong liquidity position as global cash and cash equivalents grew $21.0 million to $124.1 million. Also, on February 29, 2012, there were no outstanding borrowings under the Company's U.S. revolving asset-based credit facility, and the available borrowing capacity was $88.4 million.
Net debt declined $21.4 million to $335.1 million, while EBITDA (as defined by the Company's Term Loan Credit Agreement) improved to $121.4 million at the end of the first quarter. The Net Leverage Ratio (Net Debt / EBITDA) as calculated in the Company's Credit Agreement, improved to 2.8x at February 29, 2012, compared to 3.1x on November 30, 2011.

Discontinued Operations
As part of the Company's strategy to focus on businesses with greater global growth potential, the Company committed to divesting its commercial wallcovering businesses in the fourth quarter of 2011. As a result, the North American commercial wallcovering business and the European based commercial wallcovering business, known as Muraspec, were classified as discontinued operations. On December 12, 2011, the Company completed the sale of its North American commercial wallcovering business and received divestiture proceeds of $10.0 million along with the potential for future royalty payments. The Company will continue to operate a plant in Columbus, Mississippi for approximately 9 to 12 months while transitioning the wallcovering production to the North American purchaser.

During the quarter, the Company recorded income of $2.0 million from discontinued operations, which was comprised of the gain on the sale of the North American wallcovering business of $6.0 million which was partially offset by wallcovering related operating losses and transition-related expenses of $4.0 million from the discontinued operations. The Company expects to incur related operating loss and transition expenses throughout the remainder of the year.

Early in the second quarter of 2012, the Company divested Muraspec for approximately $6.2 million in cash and notes. During the fourth quarter of 2011, the Company wrote down the carrying value of the Muraspec assets to the expected sales price.

Performance Chemicals First Quarter 2012 Results
Net sales during the first quarter of 2012 increased $5.6 million, to $218.4 million, compared to $212.8 million in the first quarter of 2011. Sales increased due to positive pricing of $21.5 million to cover higher raw material costs and favorable product mix which was partially offset by volume decreases and unfavorable foreign currency translation effects. For the first quarter of 2012 Performance Chemicals generated record segment operating profit of $25.7 million, compared to Adjusted Segment Operating Profit of $24.8 million in the first quarter of 2011 (see Table A). Segment Operating Profit improved due to pricing actions, favorable product mix from globally positioned product lines and improved productivity.

The Adjusted Segment Operating Profit margin was 11.8% for the first quarter of 2012, compared to the Adjusted Segment Operating Profit margin of 11.7% in the first quarter of 2011.
Specialty Chemical sales were $131.9 million for the first quarter of 2012, as compared to $125.7 million for the first quarter of 2011 driven by sales in high growth areas such as global oil and gas drilling chemicals and Asian specialty rubber applications. Continuing progress was made in obtaining customer approvals for specialty latex from OMNOVA's new plant in Caojing, China.

Paper and carpet chemical sales were $86.5 million for the first quarter of 2012, as compared to $87.1 million for the first quarter of 2011, and were impacted by lower year-over-year volumes in both markets. Actions continue to be focused on higher performance and more sustainable product solutions, such as bio-based co-polymer hybrid chemistry, to deliver greater customer value.

Decorative Products First Quarter 2012 Results
Net sales were $57.5 million during the first quarter of 2012, a decrease of $1.6 million, or 2.7%, compared to the first quarter of 2011. Sales improved for global coated fabrics, and declined for laminates and performance films. Adjusted Segment Operating Profit was $2.9 million in the first quarter of 2012, compared to Adjusted Segment Operating Loss of $0.8 million for the first quarter of 2011 (see Table A). The improvement is related primarily to favorable mix, improved productivity and positive pricing actions.

Coated fabrics global sales were $30.1 million, up $1.2 million or an increase of 4.2%. Sales increased in our core coated fabrics businesses of transportation, contract upholstery and marine. We shipped our first order for a newly awarded public mass transit seating application in North America. Also, the Company's China manufacturing operations have been profitable for the last six months, driven by improved productivity and moderating raw material costs.

Laminate and performance film sales were $27.4 million, a decline of $2.8 million or 9%. Laminate product line sales increased modestly while performance film product line sales declined on weakness in pool liner and industrial applications. During the quarter, laminates received, from a large national retailer, its first major specification for duraMAX flat laminate. duraMAX is a cost effective functional alternative to thermally fused melamine.

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