SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| For the Quarter Ended May 31, 2004 | Commission File Number 1-15147 |
OMNOVA Solutions Inc.
(Exact name of registrant as specified in its charter)
| Ohio | 34-1897652 | |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
175 Ghent Road Fairlawn, Ohio 44333-3300
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (330) 869-4200
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 x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined as Rule 12b-2 of the Exchange Act). YES x NO ¨
At June 30, 2004, there were 40,295,388 outstanding shares of OMNOVA Solutions’ Common Stock, par value $0.10.
Table of Contents
| Page No | ||||||
| Part I. |
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| Item 1. |
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| Condensed Consolidated Statements of Operations – Three and Six Months Ended May 31, 2004 and 2003 |
-3- | |||||
| Condensed Consolidated Balance Sheets – May 31, 2004 and November 30, 2003 |
-4- | |||||
| Condensed Consolidated Statements of Cash Flows – Six Months Ended May 31, 2004 and 2003 |
-5- | |||||
| Notes to the Unaudited Interim Condensed Consolidated Financial Statements as of May 31, 2004 |
-6- | |||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
-14- | ||||
| Item 3. |
-20- | |||||
| Item 4. |
-21- | |||||
| Part II. |
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| Item 1. |
-21- | |||||
| Item 4. |
-21- | |||||
| Item 6. |
-22- | |||||
| -23- | ||||||
| -24- | ||||||
-2-
Condensed Consolidated Statements of Operations
(Dollars in Millions, Except Per Share Data)
(Unaudited)
| Three Months May 31, |
Six Months Ended May 31, |
||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
||||||||||||
| Net Sales |
$ | 189.5 | $ | 176.6 | $ | 349.4 | $ | 330.0 | |||||||
| Costs and Expenses |
|||||||||||||||
| Cost of goods sold |
141.7 | 133.1 | 262.0 | 248.5 | |||||||||||
| Selling, general and administrative |
36.0 | 34.8 | 69.1 | 68.9 | |||||||||||
| Depreciation and amortization |
5.7 | 6.8 | 11.5 | 13.6 | |||||||||||
| Interest expense |
5.1 | 2.9 | 10.3 | 4.9 | |||||||||||
| Other expense |
.5 | .9 | 1.5 | 2.0 | |||||||||||
| Restructuring and severance |
.1 | — | .4 | 1.1 | |||||||||||
| Deferred financing cost write-off |
— | 3.1 | — | 3.1 | |||||||||||
| 189.1 | 181.6 | 354.8 | 342.1 | ||||||||||||
| Income (Loss) Before Income Taxes |
.4 | (5.0 | ) | (5.4 | ) | (12.1 | ) | ||||||||
| Income tax expense (benefit) |
.1 | — | .1 | (.2 | ) | ||||||||||
| Net Income (Loss) |
$ | .3 | $ | (5.0 | ) | $ | (5.5 | ) | $ | (11.9 | ) | ||||
| Basic Earnings (Loss) Per Share |
|||||||||||||||
| Net Income (Loss) Per Basic Share |
$ | .01 | $ | (.12 | ) | $ | (.14 | ) | $ | (.30 | ) | ||||
| Diluted Earnings (Loss) Per Share |
|||||||||||||||
| Net Income (Loss) Per Diluted Share |
$ | .01 | $ | (.12 | ) | $ | (.14 | ) | $ | (.30 | ) | ||||
See notes to the unaudited interim condensed consolidated financial statements.
-3-
Condensed Consolidated Balance Sheets
(Unaudited)
| May 31, 2004 |
November 30, 2003 |
|||||||
| (Dollars in millions) | ||||||||
| ASSETS: |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 13.2 | $ | 14.1 | ||||
| Accounts receivable, net |
107.3 | 97.4 | ||||||
| Inventories |
55.3 | 45.1 | ||||||
| Deferred income taxes |
4.2 | 4.2 | ||||||
| Prepaid expenses and other |
4.3 | 3.8 | ||||||
| Total Current Assets |
184.3 | 164.6 | ||||||
| Property, plant and equipment |
451.4 | 445.0 | ||||||
| Accumulated depreciation |
(282.8 | ) | (270.7 | ) | ||||
| 168.6 | 174.3 | |||||||
| Trademarks and other intangible assets, net |
14.6 | 15.4 | ||||||
| Prepaid pension |
57.4 | 57.5 | ||||||
| Other assets |
26.2 | 27.1 | ||||||
| Total Assets |
$ | 451.1 | $ | 438.9 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY: |
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| Current Liabilities |
||||||||
| Current portion of long-term debt |
$ | .2 | $ | — | ||||
| Accounts payable |
89.5 | 72.1 | ||||||
| Accrued payroll and personal property taxes |
12.3 | 12.8 | ||||||
| Accrued interest |
9.4 | 9.7 | ||||||
| Other current liabilities |
18.5 | 20.4 | ||||||
| Total Current Liabilities |
129.9 | 115.0 | ||||||
| Long-term debt |
193.4 | 192.2 | ||||||
| Postretirement benefits other than pensions |
48.1 | 48.8 | ||||||
| Deferred income taxes |
4.2 | 4.2 | ||||||
| Other liabilities |
10.4 | 11.0 | ||||||
| Shareholders’ Equity |
||||||||
| Preference stock - $1.00 par value; 15.0 million shares authorized; none outstanding |
— | — | ||||||
| Common stock - $0.10 par value; 135.0 million shares authorized; 42.0 million shares |
4.2 | 4.2 | ||||||
| Additional contributed capital |
309.3 | 309.3 | ||||||
| Retained deficit |
(237.3 | ) | (231.8 | ) | ||||
| Treasury stock at cost; 1.8 million shares and 1.9 million shares as of May and |
(12.0 | ) | (12.7 | ) | ||||
| Accumulated other comprehensive gain (loss) |
.9 | (1.3 | ) | |||||
| Total Shareholders’ Equity |
65.1 | 67.7 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 451.1 | $ | 438.9 | ||||
See notes to the unaudited interim condensed consolidated financial statements.
-4-
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended May 31, |
||||||||
| 2004 |
2003 |
|||||||
| (Dollars in millions) | ||||||||
| Operating Activities |
||||||||
| Net loss |
$ | (5.5 | ) | $ | (11.9 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation, amortization and (gain)/loss on sale of fixed assets |
11.5 | 12.6 | ||||||
| Write-off of deferred financing costs |
— | 3.1 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Current assets |
(19.6 | ) | (72.1 | ) | ||||
| Current liabilities |
15.2 | 10.6 | ||||||
| Other noncurrent assets |
.8 | (.2 | ) | |||||
| Other noncurrent liabilities |
(1.1 | ) | .7 | |||||
| Net Cash Provided By (Used In) Operating Activities |
1.3 | (57.2 | ) | |||||
| Investing Activities |
||||||||
| Capital expenditures |
(3.8 | ) | (4.6 | ) | ||||
| Proceeds from asset dispositions |
— | 1.9 | ||||||
| Net Cash Used In Investing Activities |
(3.8 | ) | (2.7 | ) | ||||
| Financing Activities |
||||||||
| Long-term debt incurred |
327.1 | 125.6 | ||||||
| Long-term debt paid |
(326.1 | ) | (219.1 | ) | ||||
| Issuance of notes |
— | 165.0 | ||||||
| Payments on short-term debt, net |
— | (6.0 | ) | |||||
| Other |
.1 | (7.5 | ) | |||||
| Net Cash Provided By Financing Activities |
1.1 | 58.0 | ||||||
| Effect of exchange rate changes on cash |
.5 | .2 | ||||||
| Net Decrease in Cash and Cash Equivalents |
(.9 | ) | (1.7 | ) | ||||
| Cash and cash equivalents at beginning of year |
14.1 | 8.4 | ||||||
| Cash And Cash Equivalents At End Of Period |
$ | 13.2 | $ | 6.7 | ||||
| Supplemental Cash Flows Information |
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| Cash paid during the quarter: |
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| Interest |
$ | 10.5 | $ | 4.9 | ||||
| Income taxes |
$ | — | $ | — | ||||
See notes to the unaudited interim condensed consolidated financial statements.
-5-
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 2004
Note A – Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the OMNOVA Solutions Inc. (OMNOVA Solutions or the Company) Annual Report on Form 10-K for the fiscal year ended November 30, 2003.
The balance sheet at November 30, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements.
All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three and six month periods ended May 31, 2004 and 2003 have been reflected. The results of operations for the three and six month periods ended May 31, 2004 are not necessarily indicative, if annualized, of those to be expected for the full fiscal year.
The preparation of the financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
A detailed description of the Company’s significant accounting policies and management judgements is located in the audited financial statements for the fiscal year ended November 30, 2003, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance costs relating to operations. 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.
Certain reclassifications have been made to conform prior year’s information to the current presentation.
Note B – Inventories
Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management’s judgments of expected year-end inventory levels. The remaining portion of inventories are stated using the first-in, first-out (FIFO) method. Components of inventory are as follows:
| (Dollars in millions) | May 31, 2004 |
November 30, 2003 |
||||||
| Raw materials and supplies |
$ | 17.1 | $ | 16.3 | ||||
| Work-in-process |
3.9 | 2.4 | ||||||
| Finished products |
64.6 | 56.1 | ||||||
| Approximate replacement cost of inventories |
85.6 | 74.8 | ||||||
| LIFO reserve |
(15.6 | ) | (15.6 | |||||