Description
Filed with the SEC from Sep 27 to Oct 03:
Omnova Solutions (OMN)
Gamco decreased its holdings to 3,075,764 shares (6.6%) by selling 329,986 from July 26 through Sept. 26 for $6.97 to $8.92 each.
BUSINESS OVERVIEW
Background
Our Performance Chemicals segment began in 1952 as part of GenCorp (then known as The General Tire & Rubber Company). Initially, the business focused on the manufacture of styrene butadiene latex for the paper industry and styrene butadiene vinyl pyridine latex for tire cord adhesives in a single facility in Mogadore, Ohio. Since that time, the business has grown through internal development and acquisitions to include global manufacturing capabilities and numerous chemistries and product applications.
Products
OMNOVA Solutions’ Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, nitrile butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, phenolic and diphenylamine antioxidants, hollow plastic pigment, 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, Asia and India. Our custom-formulated products are tailored resins, binders, adhesives, specialty rubbers, antioxidants and elastomeric modifiers which are used in paper, specialty coatings, carpet, nonwovens, construction, oil/gas drilling, adhesives, tape, tire cord, 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 and deliver highly customized products that provide innovative and value-added solutions to customers.
Markets and Customers
The paper coating and carpet backing product lines are highly competitive based on quality, customer service, product performance, price, field technical support and product innovations. Major paper and carpet customers include NewPage, Verso, Shaw Industries, Sappi and Beaulieu. The specialties product line includes many product categories such as tire cord adhesives, coating resins, elastomeric modifiers, antioxidants, components for hygiene products and roofing mat. These applications are performance driven, where product innovation, technical service and application support are key competitive differentiators. Major specialty chemical customers include Sherwin Williams, RPM, Rhodia, PPG, PGI, Freudenburg, Hyosung, Shurtape, Xerox and Fiberweb.
Marketing and Distribution
Our Performance Chemicals segment primarily sells its products directly to manufacturers through dedicated internal marketing, sales and technical service teams focused on providing highly responsive customized solutions to targeted markets and industries.
Competition
Performance Chemicals primarily competes with several large chemical companies including Styron, BASF, and Lanxess. Performance Chemicals also competes with a variety of other suppliers of specialty chemicals including Lubrizol, Wacker, Celanese, Dow, Arkema, Kumho, Hexion, 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 and innovation and industry reputation. Overall, our Performance Chemicals segment regards its products to be competitive in its major categories and we believe that we are a leader in several 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, elastomers and paper coatings.
Decorative Products
Background
Our Decorative Products segment began in 1945 when GenCorp (then known as The General Tire & Rubber Company) purchased a coated fabrics manufacturing facility located in Jeannette, Pennsylvania from the Pennsylvania Rubber Company. Since that time, the business has grown through internal development and acquisitions to include four domestic and four international manufacturing sites and a wide range of decorative and functional surfacing products.
In 1999 and 2000, the business established manufacturing joint ventures in Thailand and China with an affiliate of Thailand-based Charoen Pokphand Group to expand its coated fabrics and performance film capabilities into the Asia Pacific region and provide expanded product lines to North America and Europe. During the first quarter of 2008, OMNOVA acquired the remaining equity interests in these joint ventures, which are now wholly-owned subsidiaries of the Company.
During November 2011, the Company committed to a plan to dispose of substantially all of its Decorative Products commercial wallcovering operations which is 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 Decorative Products segment develops, designs, produces and markets a broad line of functional and decorative 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; transportation markets including busses and mass transit, marine, motorcycle and automotive; recreational vehicles; manufactured housing; medical devices and products; and a variety of industrial film applications. Our core competencies in design, coating, compounding, calendering, casting, printing and embossing enable us to develop unique, aesthetically pleasing decorative surfaces that have functional properties, such as cleanability, durability and scratch and stain resistance, that address specific customer needs. We have strong color and design capabilities, an extensive design library covering a broad range of patterns, textures and colors, and strong product formulation and coating and processing capabilities. Together these capabilities provide our products with the functionality and aesthetics that add value for our customers. In addition, our broad range of products, global presence and end-use applications gives us economies of scale in sourcing, manufacturing, design, sales and marketing, and product and process development.
Markets and Customers
We believe that our Decorative Products segment is a leader in its targeted product categories. The coated fabrics, laminates and performance films businesses are highly competitive based on decorative content, functional performance, price, quality, customer service, global capability, brand name recognition, distribution networks and reputation. Decorative Products markets its products under numerous brand names to different industries. Certain of our better-known customers in this segment include Armstrong, CGT, BYD, Ashley Furniture, Patrick Industries, Herculite and Masco.
Marketing and Distribution
Our Decorative Products 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 Decorative Products segment’s products have strong, well-recognized brand names that are promoted through trade shows, industry periodicals, our website (www.omnova.com) and other media.
Competition
OMNOVA’s Decorative Products segment competes with numerous companies, including international companies. Many of these companies focus on only one product line and/or market and are smaller and privately-owned. Competitors include:
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Coated Fabrics—Nassimi, Morbern, China General, Uniroyal and Spradling International
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Laminates and Performance Films—Chiyoda Gravure, Dai Nippon Printing, Toppan Printing, Renolit Corporation, LG ChemAmerica, Riken USA Corporation, I2M and Spartech Industries
International Operations
Net sales from our foreign operations were $417.9 million in 2011, $139.6 million in 2010 and $126.4 million in 2009. These net sales represented 34.8% of our total net sales in 2011, 17.9% of our total net sales in 2010 and 20.2% of our total net sales in 2009. Long-lived assets primarily consist of net property, plant and equipment and net intangibles. Long-lived assets of our foreign operations totaled $115.3 million at November 30, 2011, $25.3 million at November 30, 2010 and $41.4 million at November 30, 2009. Our consolidated long-lived assets totaled $220.8 million at November 30, 2011, $119.7 million at November 30, 2010 and $146.3 million at November 30, 2009.
On December 9, 2010, the Company completed the acquisition of all the outstanding shares of Eliokem International SAS (“ELIOKEM”) from AXA Investment Managers Private Equity Europe and the other holders of equity securities of ELIOKEM. ELIOKEM manufactured specialty chemicals used in a diverse range of niche applications including coating resins, elastomeric modifiers, antioxidants, oilfield chemicals and latices for specialty applications. ELIOKEM was headquartered in Villejust, France which now serves as the regional headquarters for OMNOVA for Europe, the Middle East and India. As part of the acquisition, OMNOVA added former ELIOKEM manufacturing facilities located in France, China, India and the United States. ELIOKEM’s 2010 sales were $288.0 million.
Intellectual Property
We regard patents, trademarks, copyrights and other intellectual property as important to our success, and we rely on them in the United States and foreign countries to protect our investments in products and technology. Our patents expire at various times, but we believe that the loss or expiration of any individual patent would not materially affect our business. We, like any other company, may be subject to claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties from time to time in the ordinary course of business.
Seasonal Factors
We historically experience stronger sales and income in our second, third and fourth quarters, comprised of the three-month periods ending May 31, August 31 and November 30. Our performance in the first quarter (December through February) has historically been weaker due to generally lower levels of customer manufacturing, construction and refurbishment activities during the holidays and cold weather months.
Environmental Matters
Our business operations, like those of other companies in the industries in which we operate, are subject to numerous federal, state, local and foreign environmental laws and regulations. These laws and regulations not only affect our current operations, but also could impose liability on us for past operations that were conducted in compliance with then applicable laws and regulations. For further discussion of capital and noncapital expenditures for environmental compliance, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” on page 40 of this report, which is incorporated herein by reference.
Employees
At November 30, 2011, the Company employed approximately 2,300 employees at offices, plants and other facilities located principally throughout the United States, United Kingdom, France, China, India and Thailand. Approximately 9.8% or 225 of 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. In March 2011, the Company and its Akron, Ohio members of International Chemical Workers Union Council of UFCW, Local 419 agreed to a new three year contract. On September 12, 2011, the Company and its Jeannette, Pennsylvania employee members of United Steelworkers Local 22L Union agreed to a new three year contract. There is one labor contract covering approximately 54 employees which expires in 2012.
Raw Materials
Our Performance Chemicals segment utilizes a variety of raw materials, primarily monomers, in the manufacture of our products, all of which are generally available from multiple suppliers. Monomer costs are a major component of the emulsion polymers produced by this segment. Key monomers include styrene, butadiene, acrylates, acrylonitrile, vinyl acetate and vinyl pyridine (2VP). These monomers represented approximately 77% of Performance Chemicals’ total raw materials purchased on a dollar basis in 2011 for this segment.
Our Decorative Products segment utilizes a variety of raw materials that are generally available from multiple suppliers. Key raw materials include polyvinyl chloride (PVC) resins, textiles, plasticizers, paper and titanium dioxide. PVC resins, plasticizers and textiles represented approximately 56% of Decorative Products’ total raw materials purchased on a dollar basis in 2011 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 45% of Performance Chemicals sales (see discussion on page 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 $10.7 million in 2011, $8.8 million in 2010 and $8.2 million in 2009. Research and development expenses include the costs of technical activities that are useful in developing new products, services, processes or techniques, as well as those expenses for technical activities that may significantly improve existing products or processes. Information relating to research and development expense is set forth in Note A to the Consolidated Financial Statements of this report.
CEO BACKGROUND
Kevin M. McMullen
Term: Expires in 2012; Director since March 2000
Business Experience and Director Qualifications:
Mr. McMullen has been 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 to 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.
Mr. McMullen brings to the Board strong leadership, extensive management and operating experience, and a deep understanding of the Company’s business and markets. During his almost 16 years at OMNOVA, including its predecessor GenCorp, Mr. McMullen has developed extensive knowledge of the Company, its customers, investors, challenges and strengths, and has built strong relationships with the Company’s customers, suppliers, and investors. He provides the Board with candid insights into the Company’s industry, operations, management team, and strategic strengths and weaknesses.
Other Directorships:
STERIS Corporation, Mentor, Ohio.
Committees: Chairman of the Executive Committee of the OMNOVA Solutions Board.
Age: 51
Larry B. Porcellato
Term: Expires in 2012; Director since September 2008
Business Experience and Director Qualifications :
Mr. Porcellato is the Chief Executive Officer of The Homax Group, Inc. (a leader in the worldwide DIY industry), a position he has held since January 2009. From July 2002 until January 2007 he served as Chief Executive Officer of ICI Paints North America (a $1.6B division of ICI, a global specialty chemical and coatings company). Prior to that, from December 2000 until June 2002, he served as Executive Vice President and General Manager, ICI Paint Stores, North America. Previously, he served as President of Stanley Mechanics Tools from March 1999 until October 2000, and held various leadership positions with Rubbermaid Incorporated from 1988 to 1999.
Mr. Porcellato’s experience as the chief executive officer of The Homax Group, Inc. and previously ICI Paints North America, as well as his service on the board of directors of a publicly traded company, provides him with valuable experience in manufacturing and distribution of commercial and residential building products, as well as significant knowledge and expertise in the areas of strategy, general management and finance, accounting and financial reporting.
Other Directorships: HNI Corporation, Muscatine, Iowa
Committees: Member of the Compensation and Corporate Governance Committee of the OMNOVA Solutions Board.
Age: 53
Robert A. Stefanko
Term: Expires in 2012; Director since May 2006
Business Experience And Director Qualifications:
In April 2006, Mr. Stefanko retired as Chairman of the Board and Executive Vice President — Finance and Administration of A. Schulman, Inc. (an international supplier of plastic compounds and resins), positions which he had held since 1991 and 1989, respectively. Mr. Stefanko joined A. Schulman in 1972, was appointed Vice President — Finance in 1979 and became a member of A. Schulman’s Board of Directors in 1980.
Mr. Stefanko’s prior experience as Chairman of the Board and Executive Vice President — Finance and Administration at A. Schulman, and his current service on the board of directors of another publicly traded company, provides him with valuable specialty chemicals industry and international business experience and significant knowledge and expertise in the areas of general management, finance, accounting and financial reporting matters, tax, investor relations and risk management.
Other Directorships: Myers Industries Inc., Akron, Ohio and, previously, The Davey Tree Expert Company, Kent, Ohio.
Committees: Member of the Audit Committee of the OMNOVA Solutions Board.
Age: 69
David J. D’Antoni
Term: Expires in 2013; Director since November 2003
Business Experience and Director Qualifications:
In September 2004, Mr. D’Antoni retired from his positions as Senior Vice President and Group Operating Officer of Ashland Inc. (a chemical, energy and transportation construction company), positions which he had held since 1988 and 1999, respectively. Mr. D’Antoni also previously served as President of APAC, Inc. and as President of Ashland Chemical Company.
Mr. D’Antoni’s prior experience as a senior executive at Ashland and his current service on the boards of directors of two other publicly traded companies provides him with valuable chemicals industry experience and significant knowledge in the areas of corporate governance, general management, acquisitions and divestitures, environmental, health and safety matters, operations, purchasing and sales.
Other Directorships: State Auto Financial Corporation, Columbus, Ohio and Compass Minerals International, Inc., Overland Park, Kansas.
Committees: Member of the Compensation and Corporate Governance Committee of the OMNOVA Solutions Board.
Age: 67
Michael J. Merriman
Term: Expires in 2014; Director since March 2008
Business Experience and
Director Qualifications:
Mr. Merriman has been an Operating Advisor for Resilience Capital Partners LLC (a leading private equity firm focused on acquiring companies experiencing a variety of special situations, including underperformers, corporate divestitures, turnarounds and orphan public companies, within a broad range of industries) since July 2008. From November 2006 until its sale in November 2007, Mr. Merriman served as Chief Executive Officer of The Lamson & Sessions Co. (a manufacturer of thermoplastic conduit, fittings and electrical switch and outlet boxes). Previously, Mr. Merriman served as Chief Financial Officer of American Greetings Corporation (a consumer products company specializing in greeting cards, gift wrap, party goods and other social expressions) from September 2005 until November 2006. Prior to that, from August 1995 until April 2004, Mr. Merriman was the President and Chief Executive Officer of Royal Appliance Mfg. Co./Dirt Devil Inc. (a publicly traded manufacturer of a full line of cleaning products for home and commercial use). In April 2003, Royal was sold to its largest supplier, Techtronic Industries Co., Ltd.
Mr. Merriman’s prior experience as the chief executive officer and chief financial officer of two public companies and his current service on the boards of directors of three other publicly traded companies, as well as his experience at Resilience, provides him with valuable experience and significant knowledge in the areas of executive management, strategy, corporate governance, acquisitions and divestitures, finance and financial reporting, and investor relations.
Other Directorships: American Greetings Corporation, Cleveland, Ohio; Regis Corporation, Edina, Minnesota; Nordson Corporation, Westlake, Ohio; and, previously, RC2 Corporation, Oak Brook, Illinois.
Committees: Chairman of the Compensation and Corporate Governance Committee, Member of the Executive Committee and Presiding Director of the OMNOVA Solutions Board.
Age: 55
Steven W. Percy
Term: Expires in 2013; Director since October 1999
Business Experience and
Director Qualifications:
Mr. Percy retired from BP America in March 1999 after having served as its Chairman and CEO since 1996, and having completed a twenty-three year career with BP during which time he held a variety of increasingly responsible leadership positions, both in the United States and Europe, including among others chief executive of BP Finance International.
Mr. Percy’s prior experience as Chairman and CEO of BP America, as well as his experience as the chief executive of BP Finance International, provides him with significant knowledge regarding the industries in which the Company operates, the oil-based raw materials upon which the Company depends, accounting and financial expertise, as well as valuable experience in the areas of general management and environmental, health and safety matters.
Other Directorships: Non-Executive Chairman of Wavefront Technology Solutions, Inc., Edmonton, Alberta, Canada, and, previously, Non-Executive Chairman of Losonoco Inc., London, England.
Committees: Chairman of the Audit Committee and member of the Executive Committee of the OMNOVA Solutions Board.
Age: 65
Allan R. Rothwell
Term: Expires in 2013; Director since January 2010
Business Experience
And Director Qualifications:
In April 2006, Mr. Rothwell retired from his position as Executive Vice President of Eastman Chemical Company (a global chemical company which manufactures and markets a broad portfolio of chemicals, fibers and plastics) and President of the Voridian division of the company, a position which he had held since January 2002. Previously, Mr. Rothwell had served as President, Polymer Group from 2001 to 2002, President, Chemicals Group from 1999 to 2001, and as Senior Vice President and Chief Financial Officer from 1998 to 1999, in each case for Eastman Chemical Company.
Mr. Rothwell’s prior experience as a senior executive officer of Eastman Chemical Company and his current service on the board of directors of another publicly traded company provides him with valuable chemicals industry experience and significant knowledge and expertise in the areas of general management, strategic planning, sales, finance, international business and acquisitions and divestitures.
Other Directorships: Compass Minerals International, Inc., Overland Park, Kansas.
Committees: Member of the Audit Committee of the OMNOVA Solutions Board.
Age: 64
William R. Sellbach
Term: Expires in 2014; Director since April 2002
Business Experience and
Director Qualifications:
Mr. Seelbach is currently Senior Advisor of the Riverside Company (a large private equity firm investing in premier companies at the smaller end of the middle market), which he joined in January 2007. Prior to that, Mr. Seelbach served as President and CEO of the Ohio Aerospace Institute (an organization that brings together participants from industry, universities, and federal laboratories to undertake research and development projects, training, and information exchange activities) from April 2003 to December 2006. Previously, he was President of Brush Engineered Materials, Inc., Cleveland, Ohio (a manufacturer of high performance engineered materials) from 2001 to May 2002. Prior to that, he served as President, Brush Wellman Inc. from 2000 to 2001 and as President, Alloy Products division of Brush Wellman from 1998 to 2000. From 1987 to 1998, Mr. Seelbach was Chairman and Chief Executive Officer of Inverness Partners, a limited liability company engaged in acquiring and operating Midwestern manufacturing companies.
Mr. Seelbach’s prior experience as a public company executive officer and director, as well as his experience at Riverside and Inverness Partners, provides him with valuable experience and significant knowledge in the areas of executive management, strategy, operations, corporate governance, acquisitions and divestitures and finance.
Other Directorships: Previously, Corrpro Companies, Inc., Medina, Ohio.
Committees: Member of the Compensation and Corporate Governance Committee of the OMNOVA Solutions Board.
Age: 63
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
The Company is an innovator of emulsion polymers, specialty chemicals, and decorative and functional surfaces for a variety of commercial, industrial and residential end uses. As discussed in Item 1, Business, the Company operates two reportable business segments: Performance Chemicals and Decorative Products. The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, nitrile butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, phenolic and diphenylamine antioxidants, hollow plastic pigment, fluorochemicals and bio-based chemistries. Performance Chemicals’ custom-formulated products are tailored resins, binders, adhesives, specialty rubbers, antioxidants and elastomeric modifiers which are used in paper, specialty coatings, carpet, nonwovens, construction, oil/gas drilling, adhesives, tape, tire cord, floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses, bio-based polymers and various other specialty applications. The Decorative Products segment develops, designs, produces and markets a broad line of functional and decorative surfacing products, including coated fabrics, performance fabrics, printed and solid color 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 consumer electronics; and performance films for pool liners, banners, tents, ceiling tiles and medical devices. Please refer to Item 1, Business, of this Annual Report on Form 10-K for further description of and background on the Company’s operating segments.
The Company’s products are primarily sold to manufacturers and end users directly and through agents.
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 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 40% of its sales in 2011 and approximately 65% of its sales for 2009 and 2010. The decrease in the percentage of the sales price index contracts in 2011 is due to the addition of ELIOKEM sales. Customers with sales price index contracts are primarily in the paper and carpet chemicals product line. The index is generally comprised of several components: a negotiated fixed amount per pound; the market price of key raw materials (i.e., styrene and butadiene); and the price per barrel of oil. 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.
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, working capital turnover, inventory, productivity, new product vitality, cost of quality and order fill-rates which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.
Key financial measures utilized by management to evaluate the results of its businesses and to understand the key variables impacting the current and future results of the Company include: sales, gross profit, selling, general and administrative expenses, adjusted operating profit, adjusted net income, consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as set forth in the Net Leverage Ratio in the Company’s $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.
Purchase Transaction
On December 9, 2010, the Company completed the acquisition of all the outstanding shares of Eliokem International SAS (“ELIOKEM”) from AXA Investment Managers Private Equity Europe and the other holders of equity securities of ELIOKEM for an aggregate purchase price of $301.7 million in cash. The Company used its cash on hand, the net proceeds from the issuance of its 7.875% Senior Notes due 2018 (“Senior Notes”) and net proceeds from a new $200 million Term Loan to fund the acquisition. The balance of the proceeds from the financing was used for repayment of the Company’s existing term loan and related costs.
ELIOKEM manufactured specialty chemicals used in a diverse range of niche applications including coating resins, elastomeric modifiers, antioxidants, oilfield chemicals and latices for specialty applications. ELIOKEM was headquartered in Villejust, France which now serves as the regional headquarters for OMNOVA for Europe, the Middle East and India. As part of the acquisition, OMNOVA added former ELIOKEM manufacturing facilities located in France, the United States, China and India. ELIOKEM’s operations are included in the Performance Chemicals segment.
The transaction was accounted for under the acquisition method using the fair value concepts defined in ASC Subtopic 820-10, “Fair Value Measurements and Disclosures.” ASC Subtopic 805-10, “Business Combinations” requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.
The purchase price was allocated to the estimated fair values of ELIOKEM’s assets, liabilities and identifiable intangible assets. The excess of purchase price over the estimated fair values of assets acquired and liabilities assumed is allocated to goodwill.
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, 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 will 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 expects to recognize a gain of approximately $9.8 million from this sale transaction during the first quarter of 2012, which represents the excess of the sale price over the book value of the assets sold.
The Company will continue 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 expects the transition period will be less than one year, however it can extend up to 15 months. The net cash flows expected to be received and paid by the Company relating to the manufacture of commercial wallcovering for J. Josephson during the transition period are not expected to be 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’s European-based commercial wallcovering business, known as Muraspec, serves the global commercial wallcovering market outside of North America, including Asia. Muraspec has been operated on a standalone basis and will continue, business as usual, to design, produce, sell and service its commercial wallcovering and other products. The Company is pursuing the sale of the ongoing Muraspec business.
With the Company’s decision to exit the commercial wallcovering business, the results of operations and cash flows from these businesses have been classified as discontinued operations for all periods presented.
The loss from discontinued operations in 2011 includes long-lived asset impairment charges of $13.6 million and inventory write-downs of $2.9 million.
Fixed Asset Impairment
During the fourth quarter of 2011, the Company determined that indicators of impairment existed in its domestic and European wallcovering businesses due to lower than expected volumes and weaker overhead absorption as well as uncertain and weak market and economic conditions. Additionally, the Company determined that during 2012 it would move production of certain coated fabrics products from its Columbus, Mississippi facility to other Decorative Products facilities in an effort to realign capacity utilization. As a result, the Company’s Decorative Products segment recognized impairment charges of $0.7 million in continuing operations and $13.6 million in discontinued operations to write-down long-lived assets to fair value. The assets were written down to their estimated fair value using an orderly liquidation approach based on estimated prices the Company would receive for the underlying assets. The Company utilized Level 3 inputs in calculating the fair value of these assets including the estimated cost to a buyer to acquire substitute assets of comparable utility, adjusted for obsolescence.
Unless otherwise noted, the following discussions of the results of operations of the Company and its segments exclude the discontinued businesses.
Results of Operations of 2011 Compared to 2010
The Company’s net sales in 2011 were $1,201.1 million compared to $781.7 million in 2010. The sales improvement was driven by $337.4 million of net sales from ELIOKEM while legacy net sales increased $82.0 million. Excluding the ELIOKEM sales, the Company’s Performance Chemicals business segment revenue increased by 16.4% and the Decorative Products business segment revenue decreased 1.8%. Contributing to the sales increase in 2011 were increased pricing of $120.8 million and favorable foreign exchange translation of $8.7 million, partially offset by lower volumes of $47.6 million.
Gross profit in 2011 was $218.6 million with a gross profit margin of 18.2% compared to gross profit of $146.4 million and a gross profit margin of 18.7% in 2010. Gross profit margins declined primarily due to raw material price inflation of $120.7 million, the impact of Performance Chemicals index pricing, in which raw material costs are passed on to the customer, subject to a contractual time lag, with no gross margin benefit, new plant start-up costs and changes in product mix. Included in gross profit for 2010 were $2.9 million of strike-related and net retirement benefit plan curtailment charges.
Selling, general and administrative expenses in 2011 were $108.6 million, or 9.0% of sales, compared to $77.6 million, or 9.9% of net sales in 2010. Included in Selling, general and administrative expense in 2011 is a charge of $2.6 million relating to an allowance on trade receivables of a customer who filed bankruptcy in September 2011. On January 12, 2012, the Company entered into a new supply agreement with this customer. As part of the agreement, which was approved by the bankruptcy court judge, the customer agreed to pay $7.25 million of the $8.125 million pre-petition account receivable balance. The Company reversed $1.7 million of the above trade receivable allowance charge in the fourth quarter of 2011. Excluding the net charge for the trade receivable allowance, the increase was due primarily to the addition of ELIOKEM, while the decline as a percentage of sales was due to the higher sales and the Company’s focused ongoing effort to control costs and leverage selling, general and administrative costs across its global operations.
Interest expense was $38.0 million for 2011 compared to $8.7 million in 2010. The increase is due primarily to higher borrowing levels and an increase in interest rates from the Company’s refinancing activities in 2010 to facilitate the ELIOKEM acquisition (see “Debt” for a further discussion). The effective interest rate on the Company’s debt was 6.9% and 4.9% for 2011 and 2010, respectively. Total debt at November 30, 2011 was $455.6 million compared to $394.2 million at November 30, 2010.
Other expense was $0.4 million in 2011 compared to income of $0.6 million in 2010. Expense items included in 2010 were a fair value adjustment expense of $9.2 million related to a Euro currency option collar which the Company put in place to hedge currency risk for the pending ELIOKEM acquisition, strike-related costs of $1.0 million, losses on foreign currency transactions of $0.2 million and a customs duty settlement of $0.3 million. These expense items were partially offset by a gain of $9.7 million related to the dissolution of the Company’s joint venture marketing alliance with Rohm and Haas Company and a net gain of $0.7 million on the reversal of indemnification obligations and sales of scrap items of $0.6 million.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
The Company is an innovator of emulsion polymers, specialty chemicals, and decorative and functional surfaces for a variety of commercial, residential and industrial end uses. As discussed in Note A to the Company’s Consolidated Interim Financial Statements, the Company operates two reportable business segments: Performance Chemicals and Decorative Products. The Performance Chemicals segment produces a broad range of emulsion polymers and specialty chemicals based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, nitrile butadiene (NBR), polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal, phenolic and diphenylamine antioxidants, hollow plastic pigment, fluorochemicals and bio-based chemistries. Performance Chemicals’ custom-formulated products are tailored resins, binders, adhesives, specialty rubbers, antioxidants and elastomeric modifiers which are used in paper, specialty coatings, carpet, nonwovens, construction, oil/gas drilling, adhesives, tape, tire cord, floor care, textiles, graphic arts, polymer stabilization, industrial rubbers & hoses, bio-based polymers and various other specialty applications. The Decorative Products segment develops, designs, produces and markets a broad line of functional and decorative surfacing products, including coated fabrics, performance fabrics, printed and solid color 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; ceiling tiles; commercial and residential furniture; retail display fixtures; home furnishings and consumer electronics; and performance films for pool liners, banners, tents, ceiling tiles and medical devices. Please refer to Item 1, Business, of the Company’s 2011 Annual Report on Form 10-K for further description of and background on the Company’s operating segments.
The Company’s products are primarily sold to manufacturers and end users directly and through agents.
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 of the Company’s Consolidated Interim Financial Statements. For a reconciliation of the Company’s segment operating performance information, please refer to Note K of the Company’s Consolidated Interim 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 the third quarter of 2012. Customers with sales price index contracts are primarily in the paper and carpet chemicals product line. The index is generally comprised of several components: a negotiated fixed amount per pound; the market price of key raw materials (i.e., styrene and butadiene); and the price per barrel of oil. 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.
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, 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, monthly and quarterly depending on the needs established by operating management.
Key financial measures utilized by management to evaluate the results of its businesses and to understand the key variables impacting the current and future results of the Company include: sales, gross profit, selling, general and administrative expenses, adjusted operating profit, adjusted net income, consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as set forth in the Net Leverage Ratio in the Company’s $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.
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.
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 are 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.
The Company will continue 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 expects the transition period to be completed by November 30, 2012, however it could be extended for an additional three months at the exclusive direction of the buyer.
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 manufacturing volume produced in the Columbus, Mississippi facility. The Company will transfer the manufacturing of certain coated fabrics products to other company facilities by the end of the year.
During and following the transfer of coated fabrics production, the Company expects to incur certain cash outflows related to severance and outplacement; equipment decommissioning and relocation; facility maintenance, security and idling; and increased inventory levels to facilitate the transfer of certain products to the Company’s other manufacturing facilities. After the transfer, the Company expects to receive proceeds from the sale of excess equipment and the facility.
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.
Results of Operations for the Three and Nine Months Ended August 31, 2012 Compared to the Three and Nine Months Ended August 31, 2011
The Company's net sales in the third quarter of 2012 were $288.2 million compared to $315.0 million in the third quarter of 2011. The Performance Chemicals business segment revenue decreased by 13.3% while the Decorative Products business segment revenue increased 10.7%. Contributing to the net sales decrease in the quarter were lower pricing due to a reduction in raw material costs and volume decreases as well as unfavorable currency exchange translation effects. The Company's net sales in the first nine months of 2012 were $871.6 million compared to $899.7 million in the first nine months of 2011. The Performance Chemicals business segment revenue decreased by 5.0% while the Decorative Products business segment revenue increased 3.9%. Contributing to the decrease during the first nine months of 2012 was lower volumes and unfavorable currency exchange translation effects, which were partially offset by favorable product mix and higher pricing, primarily in the first half of 2012.
Gross profit in the third quarter of 2012 was $57.8 million with a gross profit margin of 20.1% compared to gross profit of $50.4 million and a gross profit margin of 16.0% in the third quarter of 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. Raw material costs decreased by $18.7 million in the third quarter versus the same period last year, however, the Company anticipates raw material costs to increase moderately from current levels during the fourth quarter of 2012. Gross profit in the first nine months of 2012 was $178.7 million with a gross profit margin of 20.5% compared to gross profit of $162.8 million and a gross profit margin of 18.1% in the first nine months of 2011. The increase in gross profit margin was primarily due to positive pricing actions in the first half of 2012 partially offset by higher raw material costs.
Selling, general and administrative expense in the third quarter of 2012 increased $3.6 million, to $30.4 million, or 10.5% of sales, compared to $26.8 million, or 8.5% of net sales in the third quarter of 2011. Selling, general and administrative expense in the first nine months of 2012 increased $9.6 million, to $92.1 million, or 10.6% of sales, compared to $82.5 million, or 9.2% of net sales in the first nine months of 2011. The increase for both the third quarter and first nine months of 2012 was primarily due to investments in future growth for research and development, information technology system enhancements and increased staffing and employment costs.
Interest expense was $8.8 million and $9.5 million for the third quarters of 2012 and 2011, respectively, and $27.8 million and $28.4 million for the first nine months of 2012 and 2011, respectively. Included in interest expense for the first nine months of 2012 and 2011 is approximately $1.3 million and $2.0 million, respectively, related to an interest rate swap that was settled in the first quarter of 2011. The interest rate swap settlement was being amortized over the original term of the swap which expired in May 2012.
Income tax expense was $3.4 million in the third quarter of 2012, a 33.0% effective income tax rate, compared to income tax expense of $2.2 million, or a 61.1% effective tax rate in the third quarter of 2011. The higher rate in the third quarter of 2011 was primarily due to an asset impairment charge in China for which no tax benefit was recognized due to an off setting tax valuation allowance. Income tax expense was $9.8 million, representing a 28.6% effective income tax rate, for the first nine months of 2012, compared to income tax expense of $8.9 million, or a 46.1% effective tax rate in the first nine months of 2011. The lower rate in the first nine months of 2012 was primarily due to income in foreign jurisdictions where the rate is lower than the U.S. domestic federal statutory rate, while the higher rate in the first nine months of 2011 was related to a one-time tax charge of $1.1 million resulting from the merger of ELIOKEM U.S. into OMNOVA Solutions. Cash tax payments in the U.S. are expected to be minimal for the next few years as the Company has $121.7 million of U.S. federal net operating loss carryforwards, $109.1 million of state and local net operating loss carryforwards, $0.7 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 has not provided 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 that foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. However, based on the Company's policy of permanent reinvestment, it is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. As of November 30, 2011, the non-U.S. subsidiaries have a cumulative unremitted foreign loss position of $11.7 million.
The Company generated income from continuing operations of $6.9 million or $0.15 per diluted share in the third quarter of 2012 compared to $1.4 million or $0.03 per diluted share in the third quarter of 2011. For the nine months of 2012, the Company generated income from continuing operations of $24.5 million or $0.54 per diluted share compared to $10.4 million or $0.23 per diluted share in the first nine months of 2011. Included in the first nine months of 2011 are a $1.0 million write-off of deferred financing fees as a result of refinancing actions, $2.7 million of acquisition and integration expense and a $1.1 million tax charge resulting from the liquidation transaction.
CONF CALL
Kevin Mcmullen
Good morning and thank you for joining us for our conference call to discuss fourth quarter 2009 results. Joining me today is Mike Hicks, Senior Vice President and Chief Financial Officer.
I’d like to turn the call over to Mike to make comments on forward-looking statements.
Mike Hicks - Senior Vice President & Chief Financial Officer
During this conference call OMNOVA representatives may make forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions with the company’s management, other than historical information are forward-looking statements.
These statements represent management’s current judgment on expectations for future operation. A variety of risk factors highlighted in the company’s 2008 10-K and our most recent earnings release could cause business conditions and the company’s actual results to differ materially from those expected by the company or expressed in the company’s forward-looking statements. Kevin.
Kevin Mcmullen
Thanks Mike. I am pleased to report that our OMNOVA Solutions capped off a very successful 2009 with record fourth quarter earnings per share, diluted earnings per share of $0.25 in the quarter was $0.23 higher than the prior year. With sustained performance improvement throughout 2009, OMNOVA delivered positive year-over-year and sequential EPS increases in every quarter.
I am especially proud of the great work of our associates to bring about such tremendous progress in the midst of the worst global economic recession in many decades. As it did throughout the year, our Performance Chemicals segment led the fourth quarter improvement, volume is in our chemicals businesses continue their improving trend over the last several quarters and were up 8% in the fourth quarter versus 2008.
This growth was due to wins in new applications and share gains in our existing core markets on the strength of new products and consistent commitment to technical service. While raw material costs were below the record highs we experienced in last year’s fourth quarter, they were still the highest of 2009. This margin improvement highlights how actions we have taken in our chemicals business and across the company are helping us improve profitability even as raw material costs rise.
Also, encouraging were the fourth quarter results of our Decorative Products segment, which posted its best quarterly operating profit of the year and its third consecutive profitable quarter. Leading the way was the continued improvement in profits from our Asian operations. Volumes across Decorative Products, North American markets were mixed in the fourth quarter.
While commercial wallcovering remains weak, sales of performance fabrics were down only 2% year-over-year and laminates were up 4%. OMNOVA’s strong earnings improvement also reflects aggressive ongoing efforts across the company to streamline our business processes and reduce cost. The cost actions we have taken exceeded $24 million in 2009. We continued to generate strong cash flow from operations in the fourth quarter, which allowed us to further reduce our debt and increase our future flexibility.
Net debt declined $11.5 million in the quarter, bringing the total reductions over the past 12 months to nearly $68 million. As a result, OMNOVA’s leverage ratio was two times, well below our debt covenant of 5.5 times. This flexibility has enabled us to make targeted investments in new products, process improvements, globalization and productivity initiatives, even as many of our competitors have been unable or unwilling to invest in their businesses.
In a moment I’ll provide more details on Individual Business segment performance and opportunities, but first I would like to summarize our fourth quarter financial results as reported in our earnings release. OMNOVA Solutions reported net income of $11.1 million or $0.25 per share compared to net income of $800,000 or $0.02 per share for the fourth quarter of 2008.
Selling, general and administrative expense was flat compared to a year ago at $25.6 million. For the full year SG&A declined almost $5 million, reflecting our continued focus on reducing our cost structure and controlling discretionary spending. While fourth quarter consolidated volumes were positive, sales revenue was down $30.8 million from last year to nearly $189 million. The fourth quarter continued to trend at higher sequential quarterly sales over the last nine months.
In the fourth quarter Performance Chemicals sales were down $21 million, while sales in Decorative Products were off $10 million. The declines were due primarily to reduced pricing in certain markets in light of lower year-over-year raw material costs. However it was very encouraging that consolidated volumes were positive after six consecutive quarters of year-over-year declines due to the deep global recession. For the full year sales were $696 million down 20% from 2008, volumes were down 12.5% for the year.
Gross profit in the fourth quarter was $44 million, up $9.4 million from a year ago. Gross profit margin was up 750 basis points to 23.3% compared to 15.8% in the 2008 fourth quarter. Full year gross profit improved $21.7 million to $159.7 million. The increase in gross profit for the quarter and the year reflects the hard work we’ve done to drive down manufacturing expenses and increase productivity, as well as a reduction in raw material costs.
As I mentioned earlier, OMNOVA finished the year with net debt of $111.2 million, down 9% or $11.5 million in the quarter and down 38% or nearly $68 million for the year. Our debt is comprised of $142.3 million outstanding under our term loan credit facility, which matures in 2014 and $1.8 million in short term debt in Asia. The company also has a revolving asset based credit facility, which as of the end of the fourth quarter was not being used it had available borrowing capacity of $62.1 million.
Our quarter end consolidated cash balance grew $11.9 million, finishing the year at $41.5 million. The weighted average cost of borrowing during the fourth quarter of 2009 was 4.5%, down from 5.8% in the fourth quarter of 2008. Bank covenant EBITDA improved to $18.3 million for the quarter versus $16.5 million for the fourth quarter of 2008. Our loan covenant leverage ratio of net debt-to-EBITDA at quarter end was two times.
The fourth quarter was the sixth consecutive quarter of improvement in our leverage. The bank covenant EBITDA definition is disclosed in our earnings release. Bank covenant EBITDA had several items that differed from our reported results, excluded from bank EBITDA our income from our Asian operations, LIFO and non-cash pension and 401(k) expense.
Turning to business segment results, first in Decorative Products, sales in the fourth quarter were $78 million, down 11% from the prior year, driven primarily by weak commercial wallcovering demand. However, we achieved year-over-year sales increases for laminates, certain segments of performance fabrics and for our China business in the fourth quarter.
Segment operating profit was $3.6 million, which was $8.9 million better than the fourth quarter of last year and the best quarter in 2009. Operating profit for the Decorative Products Asian businesses was $1.9 million up nearly $4 million from a year ago. The improvement was driven by increased demand for our products in China and by our cost actions in Thailand.
We are very pleased with the progress that has been made by our Decorative Products operations in China and Thailand, after OMNOVA acquired sole ownership of these businesses in early 2008. We have upgraded the leadership and capabilities of both businesses. Productivity is up and as with the domestic Decorative Products businesses, our Asian operations have worked hard to significantly reduced costs.
Cost actions across the segment, as well as improving pricing have contributed to immediate margin expansion. Clearly we still have work to do in this area, and which remains a top priority, but our actions have created a leaner, more profitable Decorative Products business.
In addition, we have achieved important new business wins in existing and new, but related markets by delivering value added products and services and leveraging our global capabilities. The fragmented competitive landscape in the Decorative Products markets has been consolidating and we expect this trend to continue. We are benefiting as weakened competitors exit businesses and we are able to step in with outstanding products and services and a stable financial position.
Our commitment to these industries and our ability to serve customer needs around the world have resulted in key business wins and position us to grow as these markets regain momentum. Taking a look now at the individual product lines in Decorative Products, first commercial wallcovering, which represents less than 12% of OMNOVA’s 2009 sales? Global sales were down in the fourth quarter as spending on commercial refurbishment and new construction continued to be tightly curtailed across virtually all market segments.
OMNOVA has invested in several innovative products for the commercial wallcovering market including a strong environmentally preferred offering that expands our branded portfolios. We continue to gain significant interest in sales from these new products, despite the market conditions. Entering 2010 we anticipate that demand of the commercial wallcovering market will continue to face challenges as commercial construction and refurbishment remain depressed.
We believe our new products, industry leading distribution network and our financial stability provide OMNOVA with a competitive advantage to work through this challenging market environment. Our performance fabrics product line includes a wide variety of end uses. Year-over-year sales were down only 2% in North America.
However, some of our product line grew, such as the North American transportation segment where sales were up substantially during the quarter, driven by school bus and mass transit demand. This is also where OMNOVA’s capability in China is providing a significant advantage.
Fourth quarter sales for the China operations were up 18% year-over-year, largely due to transportation and automotive seating applications. We do not serve automotive OEMs in a significant way in North America, but we do supply the large and fast growing Chinese automotive market. In a very short time OMNOVA has become one of the leading coated fabrics seating suppliers to automotive OEMs in China.
In addition to automotive and transportation, OMNOVA Asian capability is a major asset across a variety of other applications. Asian manufacturing provides OMNOVA with an important advantage over domestic competitors who lack this capability. As customers expand their manufacturing to Asia, they strongly prefer suppliers who can serve them with consistently high quality products on a global basis.
At the same time OMNOVA’s performance fabrics produced in both Asia and domestically are finding applications in new, exciting markets such as medical devices and healthcare equipment and seating. Although we have already been serving those markets, we see exciting opportunities for OMNOVA to grow our position through differentiated products and services.
Sales in North American laminates were up 4% in the fourth quarter from a year ago. This is great progress considering the significant downturn in market demand over the past couple of years. With recent introductions that truly differentiate our laminate product offering, we grew fourth quarter sales in the kitchen and bath, electronics, specialty applications by double digits.
In addition, we continue to win business in retail store fixture applications and are expanding our presence in the healthcare market as well. Two big users of laminates, flooring and manufactured housing, were still weak in the 2009 fourth quarter, but are expected to improve in 2010.
Finally, taking a look at the raw material environment in Decorative Products, raw material costs were flat with the third quarter, but they are starting to increase in our Asian businesses as we enter 2010. Looking ahead in Decorative Products most markets, except for commercial wallcovering, appear to have bottomed and we are encouraged by an improving demand trend.
While the recovery in North America will likely be choppy, we believe we can more than offset weakness in the wallcovering business with volume improvements in our other domestic markets and continued expansion in Asia. We remain steadfastly committed to controlling costs, increasing productivity and seizing opportunities to win new business in a consolidating industry. We have already taken many steps to bring our products inline with demand. We will continue to monitor the situation and take further actions as needed to improve profitability.
Turning now to Performance Chemicals, this segment had another very good quarter achieving necessary improvements in profitability. We were also very encouraged to achieve 8% year-over-year volume growth in the quarter in this segment. Sales of $110.8 million in the fourth quarter were off from last year, but were the highest of the year. The decline in revenue was driven primarily by lower selling prices due to raw material declines during the year and index pricing in several segments of our business.
Performance Chemicals has experienced an improving volume trend over the past five quarters. Year-over-year volume and pounds were down 29% in the fourth quarter of 2008. They were off 27% in the first quarter of 2009, down 17% in the second quarter of 2009, down 3% in the third quarter of 2009 and as I said, up 8% in the fourth quarter of 2009. Operating profit improved to $14 million compared to $10.2 million in the fourth quarter of 2008. Higher volumes, reductions in manufacturing and SG&A costs and lower raw material costs all contributed to the profit gain.
Turning to the performance chemical product lines, first for coated paper, OMNOVA’s latex volume was up double digits in the fourth quarter compared to last year, despite continued industry wide softness. This increase reflects the full effect of new business won at two mills late in the first quarter of 2009 with our GenCryl PT latex technology.
In addition OMNOVA has increased sales to new, specialty paper applications with proprietary technology. The paper industry is forecasting growth in 2010 versus 2009. Last quarter OMNOVA announced it has agreed to buy Hollow Sphere Plastic Pigment Product Line. This transaction is pending federal trade commission approval. This acquisition will further enhance OMNOVA’s paper coating portfolio.
OMNOVA’s volumes in carpet latex were up high single digits in the fourth quarter compared to last year. However, new construction and refurbishment remained sluggish. OMNOVA benefited from business wins at two mills in the second quarter of 2009 with proprietary new technology. Among recent new product introductions in carpet was NovaGreen high solids latex, suitable for both commercial and residential carpet backing.
Customers who use NovaGreen can see dry patterns along with energy usage in their mills reduced significantly. While overall the carpet industry is expected to be flat in 2010, residential carpeting, where OMNOVA had a relatively stronger position, is expected to outperform the commercial segment. Sales in the specialty chemical markets for the quarter were off only slightly from a year ago.
OMNOVA is ramping up new business with innovative technologies across a broad spectrum of core and adjacent applications such as oil and gas drilling, commercial floor polishes, adhesives, nonwovens construction and infrastructure. Our specialty chemicals serve a growing and diverse customer base around the globe. Specialty markets are expected to grow at above GDP rates in 2010. On the raw material front our Performance Chemicals business uses oil based styrene butadiene and various acrylics.
After reaching all time highs in 2008, styrene costs were down in the first half of 2009, but began to claim in the third quarter. OMNOVA buys over 200 million pounds of styrene year and a $0.01 a pound change in styrene impacts our raw material spending by approximately $2 million a year. Styrene prices were 9% higher in the fourth quarter of 2009 versus the third quarter, but down 36% compared in the fourth quarter of last year. Industry experts believe styrene will increase moderately in 2010.
Turning to butadiene, the cost was significantly lower in the first half of 2009 versus last year, but began to rise in the third quarter and sequentially it increased sharply by almost 50% in the fourth quarter. However year-over-year fourth quarter butadiene costs were down 38%. We purchase about 130 million pounds of butadiene a year and a $0.01 of pound change impacts our raw material spending by approximately $1.3 million annually.
Butadiene is expected to be in tight supply and costs are expected to continue to increase as 2010 progresses. Looking ahead in Performance Chemicals, we expect volumes to continue to improve over the course of 2010 across our end use markets. At the same time we expect raw material costs to increase as the year progresses. We expect that our broader based index pricing should contribute to greater earnings stability compared to prior inflationary periods.
In summary, 2009 fourth quarter and both full year results demonstrate OMNOVA’s dead fast commitment to delivering performance improvement and enhanced shareholder value, even in the wake of the worst recession in generations. We have achieved significant improvement in earnings and cash flow and have improved our balance sheet, providing greater flexibility.
We have made good progress in improving margins to more acceptable levels as we work towards achieving your ultimate goal of sustained double digit returns. We have many examples of growth at above market rates through our three pronged strategy of leveraging our leadership position with innovative products in our existing markets, penetrating new adjacent markets where we have the capability to win and globalizing our company.
While volume was down in 2009 due to the recession, we are encouraged by the recent volume trends, which indicate that most of our end use markets have bottomed and that demand is improving. We believe that the actions we have taken to leaner, our cost structure to drive productivity and margin improvements and to make strategic investments in our business, position us well as our markets rebound.
Turning to 2010 there are two housekeeping matters I would like to comment on for the year. Despite freezing future pension benefits for the vast majority of our workforce, the company’s pension expense will go up $1.5 million or $0.04 per share. In addition, the share count of OMNOVA stock is expected to increase approximately 250,000 shares per quarter due to vesting of prior year restricted stock awards and options. The impact of the share count is estimated to be approximately $0.03 per share.
We enter 2010 with great confidence and eagerness to build on the momentum we have created in 2009. While we know that the recovery in a global economy, especially in North America and Europe, is likely to be choppy, we do expect that volumes will clearly be stronger in 2010 versus 2009 for OMNOVA. At the same time, we anticipate raw material costs to increase as the economy improves.
Therefore, we are being ever vigilant ensuring that we continue to operate within a lean, flexible cost structure. That will continuously improve our value to customers through innovative products and services. That we accelerate our entry into attractive adjacent markets and improve our market position in our core markets.
That we fully leverage our global competitive advantage and that we obtain even higher levels of quality and productivity in our daily operations, because of seasonality, the first quarter, which begins for OMNOVA on December 1, is notoriously the weakest demand quarter for our company. Even so, we expect solid improvement in first quarter profitability versus last year. After the tremendous progress in 2009 we are excited by the opportunities before us and ready to meet the challenges of a New Year.
With that Michael and I will be happy to answer any questions that you have. Operator if you could please open the lines for question with our callers.
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Fund Letters
