OMNOVA Solutions Inc. (NYSE: OMN) has announced income from continuing operations of $0.2 million, or breakeven per diluted share, for the first quarter ended February 28, 2013. Net loss for the first quarter was $0.2 million, or breakeven per diluted share. Included in the first quarter results were restructuring, severance, manufacturing transition costs and other items which totaled $1.9 million pre-tax. These were primarily related to the closure of manufacturing operations at a plant, which had previously been disclosed.
"As we expected, operating results in our first quarter of 2013, which has been historically our weakest on a seasonal basis, were lower than last year. These results are not reflective of what we anticipate for the rest of the year. As previously disclosed, we lost significant volume in our coated paper chemicals markets late last year, which negatively impacted results in the first quarter. However, we have won new commitments that are expected to offset much of the lost volume, with product shipments beginning to ramp up in the second quarter. Additionally, weak volumes in both the European and Indian markets negatively impacted results," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer. "While we had a weak start to the quarter, we were encouraged by the profit trend as the quarter progressed, with February results significantly stronger than the prior two months.
"We have made a number of structural improvements that we expect will begin contributing to increased operating profit during the remainder of the year, including new global manufacturing capability coming online and the completion of the Columbus, Mississippi manufacturing consolidation. In addition, we have recent new business commitments from customers and are seeing encouraging signs from key end markets in which we are well positioned such as housing, oil and gas exploration, personal hygiene and transportation. As a result, we expect full-year 2013 Adjusted Income from Continuing Operations will exceed last year's performance," said McMullen.
Consolidated Results for the First Quarter Ending February 28, 2013
Net sales decreased $24.2 million, or 8.8%, to $251.7 million for the first quarter of 2013, compared to $275.9 million for the first quarter of 2012. The sales decrease was driven by lower volume of $19.7 million, or 7.1%, and reduced pricing of $4.7 million, partially offset by favorable currency translation effects of $0.2 million.
Gross profit in the first quarter of 2013 decreased to $49.0 million, compared to $60.9 million in the first quarter of 2012, due primarily to the lower volumes. Raw material costs declined $3.1 million in the first quarter versus the same period last year. Gross profit margins in the first quarter of 2013 were 19.5%, compared to margins of 22.1% in the first quarter of 2012. The decline was due to the lower volumes, reduced pricing and related manufacturing cost absorption.
Selling, general and administrative expense (SG&A) in the first quarter of 2013 was $30.5 million, or 12.1% of sales, compared to $29.5 million, or 10.7% of sales, in the first quarter of 2012. The increase was due to higher outside services, health care and other employee costs.
Interest expense in the first quarter of 2013 was $8.6 million, a decrease of $0.9 million from the first quarter of 2012, due primarily to the completed amortization in 2012 of an interest rate swap agreement.
Income tax expense was $0.6 million, representing a 75.0% effective income tax rate, for the first quarter of 2013, compared to income tax expense of $3.5 million, or a 24.6% effective tax rate in the first quarter of 2012. The lower rate in the first quarter of 2012 was due primarily to a foreign tax benefit of $1.0 million. The higher rate in the first quarter of 2013 was primarily related to the low pre-tax income results. While the first quarter effective tax rate appears high at 75%, the Company estimates its full-year 2013 effective rate will be approximately 30% to 33%.
Cash tax payments in the U.S. over the next few years are expected to be minimal as the Company has $116.8 million of U.S. federal net operating loss carryforwards and $90.0 million of state and local tax net operating loss carryforwards with expiration dates between 2022 and 2032.
Net loss for the first quarter of 2013 was $0.2 million, or breakeven per diluted share, compared to net income of $13.5 million, or $0.29 per diluted share, for the first quarter of 2012. This included a loss from discontinued operations of $0.4 million for the first quarter of 2013, compared to income from discontinued operations of $2.8 million, or $0.06 per diluted share, in the first quarter of 2012. Income from continuing operations for the first quarter of 2013 was $0.2 million, or breakeven per diluted share, compared to $10.7 million, or $0.23 per diluted share, for the first quarter of 2012. Adjusted Income From Continuing Operations was $1.5 million, or $0.03 per diluted share for the first quarter of 2013, compared to Adjusted Income From Continuing Operations of $10.0 million, or $0.22 per diluted share, in the first quarter of 2012 (see Tables B and C).
As of February 28, 2013, the Company's debt of $454.0 million was comprised of $250.0 million of 7.875% Senior Notes maturing in 2018, a term loan of $195.5 million maturing in 2017 and $8.5 million of foreign operations borrowing. The Company's liquidity position remained strong and totaled $200.1 million. Liquidity was comprised of cash, cash equivalents and restricted cash of $122.0 million and $78.1 million of available borrowing capacity under the Company's U.S. revolving asset-based credit facility.
Net Debt increased $26.9 million to $334.2 million during the quarter due primarily to an increase in working capital. However, Net Debt was flat with the same period a year ago. Adjusted EBITDA (as defined in the Company's Term Loan Credit Agreement, see Table D) declined to $97.4 million at the end of the first quarter of 2013. The Company was in compliance with all lender covenants.
In March, the Company amended and extended its $195.5 million term loan facility by one year, to May 2018. Additionally, the floating-rate pricing of this debt declined by 1.25%, to 4.25%, or a savings of $2.4 million per year at prevailing LIBOR rates.
Discontinued Operations
As part of a strategy to focus on businesses with greater global growth potential, the Company divested its North American and U.K.-based commercial wallcovering businesses in fiscal 2012, receiving proceeds of $16.2 million in cash and notes, along with the potential for future royalty payments. These businesses were classified as discontinued operations at the end of fiscal 2011. As part of a manufacturing transition agreement with the buyer, the Company continued to operate a plant in Columbus, Mississippi, which made commercial wallcovering and coated fabric products until February 2013, when production ceased.
Performance Chemicals First Quarter 2013 Results
Net sales during the first quarter of 2013 decreased $27.2 million, to $191.2 million, compared to $218.4 million in the first quarter of 2012. Sales decreased due to volume declines of $22.2 million or 10.2%, reduced pricing of $4.9 million and unfavorable foreign currency translation of $0.1 million. For the first quarter of 2013, Performance Chemicals generated Adjusted Segment Operating Profit of $15.1 million, compared to Adjusted Segment Operating Profit of $25.7 million in the first quarter of 2012 (see Table A). Adjusted Segment Operating Profit declined due primarily to the lower volumes.
Adjusted Segment Operating Profit margin was 7.9% for the first quarter of 2013, compared to Adjusted Segment Operating Profit margin of 11.8% in the first quarter of 2012.
Specialty chemical sales declined $8.0 million to $123.9 million for the first quarter of 2013, compared to $131.9 million for the first quarter of 2012, driven primarily by lower sales in tire cord, elastomeric modifiers, specialty rubbers and contract manufacturing. This was partially offset by sales growth in key global product lines that enjoy solid market positions in Asia, including nonwovens, oil and gas drilling chemicals, antioxidants, tape/adhesive and floor care. Regionally, specialty chemical sales were lower in Europe and India versus last year, but higher in Asia. The oil and gas drilling chemical business generated initial sales for three new products during the quarter. The Company also received commitments for additional volumes in roofing and construction applications. Continued progress was made in obtaining customer approvals for specialty latex from OMNOVA's newest plant in Caojing, China, which ran at 50% utilization levels supplying tire cord products and was profitable throughout the quarter. Additionally, the construction of new styrene butadiene latex capacity and capability on the Caojing site is nearing completion. Commissioning and customer qualifications are expected to occur during the second half of the year.
Paper and carpet chemical sales were $67.3 million for the first quarter of 2013, compared to $86.5 million for the first quarter of 2012, driven primarily by lower year-over-year volumes in both markets. The Company previously disclosed the loss of approximately 60 million pounds to competitive activity in the last half of 2012, but has won new commitments that are expected to significantly offset the volume loss with product shipments beginning to ramp up in the second quarter of 2013. Actions continue to be focused on higher performance and more sustainable product solutions, such as bio-based co-polymer hybrid chemistry as well as high strength technologies, to deliver greater customer value. Commissioning and scale-up of the Company's new hollow plastic pigment product, which utilizes re-purposed styrene-butadiene latex reactors, is progressing with customer conversions and new account penetrations expected late in the second quarter.
Engineered Surfaces First Quarter 2013 Results
Net sales were $60.5 million during the first quarter of 2013, an increase of $3.0 million, or 5.2%, compared to the first quarter of 2012. Sales improved by 2.5% for global coated fabrics and 7.8% for global laminates and performance films. Adjusted Segment Operating Profit was $1.8 million in the first quarter of 2013, compared to Adjusted Segment Operating Profit of $3.0 million for the first quarter of 2012 (see Table A). The decline in Adjusted Segment Operating Profit was the result of $0.8 million of lower LIFO and other inventory valuations compared to the first quarter of 2012, due to the transition of coated fabrics production and $0.4 million of higher raw material and manufacturing costs.
Global coated fabric sales were $28.9 million, up $0.7 million or an increase of 2.5%. Sales improved in Asia, but declined in North America. The sales improvement in Thailand and China was due primarily to higher volumes in transportation markets as a result of new automotive wins. North American sales declined primarily due to customer pre-buys in the fourth quarter of 2012 in anticipation of the Columbus, Mississippi manufacturing plant shutdown. During the quarter, wallcovering and coated fabrics production ceased at the facility and the volume was moved to other OMNOVA facilities. Coated fabrics profitability is forecasted to improve over the remaining three quarters of 2013 versus the prior year as customer trials have been completed, and orders are expected to ramp up from current levels.
Laminate and performance film sales were $31.6 million, an increase of $2.3 million or 7.8%, led by a strong demand in residential and commercial construction-related markets for products that go into kitchen and bath, flooring, store fixture and display applications.
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SOURCE OMNOVA Solutions Inc.