Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Overview
The Company is an innovator of emulsion polymers and specialty chemicals and decorative and
functional surfaces for a variety of commercial, industrial and residential end uses. The Company operates in 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, styrene butadiene acrylonitrile, vinyl pyridine, polyvinyl acetate, acrylic, styrene acrylic, vinyl acrylic, glyoxal and fluorochemical chemistries. Performance
Chemicals custom-formulated products include coatings, binders and adhesives, which are used in paper, carpet, nonwovens, textiles, construction, floor polish, masking tape, adhesives, tire cord, plastic parts and various other applications.
The Decorative Products segment develops, designs, produces and markets a broad line of decorative and functional surfacing products, including commercial wallcoverings, coated and 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, residential cabinets, flooring and furnishings, transportation markets including school busses, marine
and automotive, performance films and fabric and manufactured housing.
The Companys products are sold to manufacturers, independent
distributors and end users through internal marketing and sales forces and agents.
The Company has strategically located manufacturing
facilities in the U.S. and U.K. along with its joint venture manufacturing facilities in China 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 Companys performance in the first quarter (December through
February) has historically been weaker due to generally lower levels of customer manufacturing, refurbishment and construction over the holidays and cold weather months.
The Companys chief operating decision maker evaluates performance and allocates resources by operating segment. Segment information has been prepared in accordance with the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures About Segments of an Enterprise and Related Information. The Companys two operating segments were determined based on
products and services provided. Accounting policies of the segments are described in Note A Basis of Presentation in both this Quarterly Report on Form 10-Q and the Companys Annual Report on Form 10-K. For a reconciliation of the
Companys segment operating performance information to consolidated operating performance information, please refer to Note L of the Companys Unaudited Interim Consolidated Financial Statements.
Effective December 1, 2006, the Company renamed its Commercial Wallcoverings product line Contract Interiors and realigned certain product sales
from the Coated Fabrics product line to Contract Interiors in order to better reflect common sales and marketing resources used to serve customers. All prior period amounts have been reclassified to conform to current year presentation.
Key Indicators
Key economic measures relevant to
the Company include coated paper production, print advertising spending, U.S. commercial real estate and hotel 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 building construction, housing, furniture manufacturing and flooring
manufacturing. These measures provide general information on trends relevant to the demand for the Companys products but the trend information does not necessarily directly correlate with demand levels in the markets which ultimately use the
Companys products.
-16-
Key operating measures utilized by the business segments include orders, sales, working capital turnover,
inventory, productivity, new product vitality 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 the Companys management and business segments in order to evaluate the results of its
business and in understanding key variables impacting the current and future results of the Company include: sales, gross profit, selling, general and administrative expenses, operating profit before excluded items, consolidated earnings before
interest, taxes, depreciation and amortization as set forth in the Companys $150,000,000 Term Loan Credit Agreement (Consolidated EBITDA), working capital, operating cash flows, capital expenditures and earnings per share before
excluded items, including applicable ratios such as inventory turnover, average working capital and return on sales and assets. 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.
Results of Operations for the Three and Nine Months Ended August 31, 2007 and
2006
The Companys net sales for the three months ended August 31, 2007 were $196.8 million compared to $175.1 million for
the three months ended August 31, 2006. The Performance Chemicals segment experienced a revenue increase of 15.6% and the Decorative Products segment experienced a revenue increase of 7.0%. Contributing to the sales increase in the third
quarter of 2007 were improved volumes of $14.2 million, sales price increases of $6.1 million and favorable foreign exchange translation of $1.4 million. Gross profit decreased to $36.8 million, with a gross profit margin of 18.7%, in the third
quarter of 2007 as compared to $37.9 million, with a gross profit margin of 21.6%, in the third quarter of 2006. Cost of goods sold for the third quarter of 2007 increased $22.8 million to $160.0 million, compared to the same period last year
driven by higher raw material costs of $8.5 million, increased volume, and manufacturing costs of $11.0 million, higher transportation costs of $1.0 million, and $2.3 million for resale merchandise.
The Company had segment operating profit of $10.2 million in the third quarter of 2007 compared to a segment operating profit of $10.7 million in the
same period in 2006. Operating margins in the third quarter of 2007 were 5.2% compared to 6.1% in the same period of 2006. The decrease in segment operating profit was primarily due to higher raw materials costs, increased quality and manufacturing
costs and higher transportation costs, partially offset by volume improvements, pricing actions and cost reductions. Segment operating profit also includes items that management excludes when evaluating the results of the Companys segments.
Those items for the third quarter of 2007 included restructuring and severance charges of $0.1 million resulting primarily from workforce reductions.
Net sales for the nine months ended August 31, 2007 were $549.6 million compared to $522.7 million for the nine months ended August 31, 2006. Gross profit was $104.0 million, with a gross profit margin of
18.9%, for the first nine months of 2007 as compared to $112.9 million, with a gross profit margin of 21.6%, for the first nine months of 2006.
The Company had a segment operating profit of $23.0 million in the first nine months of 2007 compared to a segment operating profit of $30.7 million in the first nine months of 2006. The decrease in segment operating profit was primarily
due to higher raw material costs of $16.8 million, higher transportation costs of $2.6 million, increased quality and manufacturing costs of $2.2 million, and higher health care costs of $0.7 million, partially offset by pricing actions of
$12.0 million, lower utility costs of $0.6 million, higher profit on volumes of $0.4 million, and cost reductions of $1.9 million. Segment operating profit also includes items that management excludes when evaluating the results of the
Companys segments. Those items for the first nine months of 2007 included restructuring and severance charges of $0.3 million resulting primarily from workforce reductions.
-17-
Income from continuing operations and net income was $4.5 million in the third quarter of 2007, or $0.11
per diluted share, compared to income from continuing operations of $1.2 million, or $0.03 per diluted share and net income of $3.3 million, or $0.08 per diluted share in the third quarter of 2006. The Company had a loss from continuing operations
and net loss of $10.4 million in the first nine months of 2007, or $0.25 per diluted share, compared to income from continuing operations in the first nine months of 2006 of $3.9 million, or $0.09 per diluted share and net income of
$4.3 million, or $0.10 per diluted share. Included in the first nine months of 2007 are debt redemption costs of $12.4 million and restructuring and severance costs of $0.5 million.
Performance Chemicals
Performance Chemicals net sales increased 15.6% to $126.7 million during
the third quarter of 2007 compared to $109.6 million during the third quarter of 2006, driven by volume increases of $9.5 million, higher selling prices of $7.2 million and $0.4 million of favorable foreign exchange translation. Net sales for the
Paper and Carpet chemicals product line increased to $82.5 million during the third quarter of 2007 compared to $72.9 million during the third quarter of 2006, primarily as a result of higher selling prices of $6.7 million and volume increases
of $2.9 million due to an increase in market share in paper which was partially offset by lower volumes in carpet due to the slow down in the carpet industry resulting from reduced new housing starts. Net sales for the Specialty Chemicals product
line increased to $44.2 million during the third quarter of 2007 compared to $36.7 million during the third quarter of 2006, primarily due to volume increases of $6.6 million, higher selling prices of $0.5 million and favorable foreign
exchange translation of $0.4 million.
This segment generated an operating profit of $7.9 million for the third quarter of 2007 compared to
$8.2 million in the third quarter of 2006. The decrease in segment operating profit was due to higher raw material costs of $9.0 million and higher transportation costs of $0.8 million, partially offset by profit on higher sales volume of
$2.1 million, selling price increases of $7.2 million and cost reductions of $0.2 million.
Performance Chemicals net sales
increased to $348.9 million during the first nine months of 2007 compared to $330.4 million during the first nine months of 2006, driven by higher selling prices of $12.6 million, increased volume of $4.5 million and $1.4 million of favorable
foreign exchange rates. Net sales for the Paper and Carpet chemicals product line increased 4.8% to $228.3 million during the first nine months of 2007 compared to $217.9 million during the first nine months of 2006. The increase was primarily due
to higher selling prices of $11.2 million partially offset by lower volumes of $0.8 million primarily as a result of lower volumes in carpet due to the slow down in the carpet industry resulting from reduced new housing starts. Net sales for the
Specialty Chemicals product line increased 7.2% to $120.6 million during the first nine months of 2007 compared to $112.5 million during the first nine months of 2006, primarily due to volume increases of $5.3 million, higher selling prices of
$1.4 million and favorable foreign exchange translation of $1.4 million.
This segment generated an operating profit of $17.3 million for
the first nine months of 2007 compared to $22.3 million in the first nine months of 2006. The decrease in segment operating profit was due to higher raw material costs of $18.6 million, increased transportation costs of $2.3 million and higher
health care costs of $0.2 million, partially offset by selling price increases of $12.6 million, lower utility costs of $0.8 million and cost reductions of $2.7 million.
Decorative Products
Decorative Products net sales increased by 7.0% to $70.1 million in the third
quarter of 2007 from $65.5 million in the third quarter of 2006. Contract Interiors net sales of $29.9 million during the third quarter of 2007 were 7.9%, or $2.2 million higher than the third quarter of 2006, primarily as a result of higher
volume in the domestic and European wallcovering market and favorable foreign exchange rates from the British Pound Sterling and the Euro. Net sales for the Coated Fabrics product line increased 13.3% to $22.1 million during the third quarter
of 2007 compared to $19.5 million during the third quarter of 2006, primarily as a result of higher volume in transportation, pool liners and marine. Net sales for the Laminates product line decreased 1.1% to $18.1 million during the third quarter
of 2007 compared to $18.3 million during the third quarter of 2006 primarily due to lower volume in kitchen and bath and furniture, partially offset by higher volume in manufactured housing, consumer electronics and flooring.
-18-
This segment generated an operating profit of $2.3 million during the third quarter of 2007 compared to
$2.5 million during the third quarter of 2006. The decrease in operating profit for the third quarter of 2007 as compared to the third quarter of 2006 was due to higher quality and manufacturing costs of $0.8 million, lower pricing of $1.1 million,
higher transportation costs of $0.2 million and lower income from the Companys joint ventures of $0.1 million, due to higher raw material costs in Asia, partially offset by the profit on additional volumes of $1.4 million and lower
domestic raw material and other cost reductions of $0.7 million. Included in the Companys Asian joint venture earnings was a favorable value added tax benefit of $0.4 million, which was a reversal of a first quarter charge. The segment
operating profit also includes items which management excludes when evaluating the results of the Companys segments. Those items for the third quarter of 2007 are restructuring and severance charges of $0.1 million resulting primarily
from workforce reductions.
Decorative Products net sales increased by 4.4% to $200.7 million in the first nine months of 2007 from $192.3
million in the first nine months of 2006. Contract Interiors net sales of $89.3 million during the first nine months of 2007 were $5.2 million higher than the first nine months of 2006 primarily due to higher volume in European wallcovering and
favorable foreign exchange rates from the British Pound Sterling and the Euro, partially offset by slightly lower domestic wallcovering volumes. Net sales for the Coated Fabrics product line increased 10.2% to $59.3 million during the first
nine months of 2007 compared to $53.8 million during the first nine months of 2006, primarily as a result of higher volume in transportation, pool liner and films, which was partially offset by lower volumes of rigid films. Net sales for the
Laminates product line decreased 4.2% to $52.1 million during the first nine months of 2007 compared to $54.4 million during the first nine months of 2006 primarily due to lower volume in kitchen and bath.
This segment generated an operating profit of $5.7 million during the first nine months of 2007 compared to $8.4 million during the first nine months of
2006. The lower operating profit for the first nine months of 2007, as compared to the first nine months of 2006 was due to higher manufacturing and maintenance costs of $1.7 million, greater health care costs of $0.5 million, ERP system
implementation costs of $0.4 million, higher transportation costs of $0.3 million, higher utilities costs of $0.2 million, lower pricing of $0.6 million and lower income from the Companys joint ventures of $0.9 million due to higher raw
material costs in Asia and start-up costs related to a new manufacturing plant near Shanghai, partially offset by lower domestic raw material costs of $1.8 million and the profit on additional volumes of $0.4 million. The segment operating profit
also includes items which management excludes when evaluating the results of the Companys segments. Those items for the first nine months of 2007 were restructuring and severance charges of $0.3 million resulting primarily from workforce
reductions.
Corporate
Interest
expense for the third quarter and first nine months of 2007 was $3.3 million and $12.6 million, respectively, compared to $5.1 million and $15.5 million for the third quarter and first nine months of 2006, respectively. The decrease is due to lower
average debt outstanding and a reduction in average interest rates.
As described
under Long Term Debt, on May 22, 2007, the Company entered into a $150 million Term Loan. The Term Loan carries a variable interest rate based on, at the Companys option, either an alternate base rate or a eurodollar rate, in each case
plus an applicable margin. The proceeds of the Term Loan, along with cash and other resources of the Company, were used to redeem its $165 million 11
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% Senior Secured Notes. In connection with the redemption of the Notes, the Company paid $9.8 million in premium and tender fees and wrote off $2.6 million of unamortized debt issuance costs.
Additionally, the Company entered into a $50 million notional amount interest rate swap to fix the interest rate on a portion of the Term Loan. As of August 31, 2007, the weighted average interest rate on the Companys outstanding debt was
7.8% as compared to an average rate of 10.8% during 2006. At debt levels and weighted average interest rate which existed at August 31, 2007, the Companys annualized interest expense savings would be approximately $6.0 million. As a
portion of the interest rates are variable, future interest rates may increase or decrease and the Companys future debt levels may change due to required or voluntary principal payments. Therefore, actual interest expense savings may be
materially different.
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Corporate expenses were $2.4 million and $8.4 million during the third quarter and first nine months of
2007, respectively, compared to $4.4 million and $11.2 million during the third quarter and first nine months of 2006, respectively. The decrease for both the third quarter and full year of 2007 was primarily due to lower employee costs and lower
incentive and deferred compensation plan expense compared to prior year.
The Company did not record income tax expense during the first
nine months of 2007 compared to income tax expense of $0.1 million, relating to foreign income taxes, during the first nine months of 2006. The Companys estimated effective income tax rate of 0% is substantially less than its federal statutory
rate of 35% because no tax benefits have been provided on losses during the year. Due to the Companys history of cumulative losses, the Company has provided a full valuation allowance of approximately $91.8 million against its net deferred tax
assets due to the uncertainty of realization of such assets. As discussed in Footnote MIncome Taxes, as of November 30, 2006, the Company had approximately $114.2 million of domestic federal net operating losses with a carryforward period
of approximately 20 years.
Discontinued Operations
On September 27, 2006, the Company sold substantially all of the assets and liabilities of the Building Products business to BFS Diversified Products, LLC, for $25.9 million in cash resulting in a gain of $18.2
million. No income taxes were provided due to the utilization of a portion of the Companys net operating loss carryforwards. The Company retained $10.5 million of Building Products trade accounts receivable, all of which were collected as
of November 30, 2006.
In accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the results of operations and cash flows of the Building Products business for all periods presented have been reported as discontinued operations. This transaction allows the Company to focus its resources on its strategic
product lines with strong market positions and will provide the Company with flexibility to grow its remaining segments.
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(Dollars in millions)
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Three Months Ended
August 31, 2006
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Nine Months Ended
May 31, 2006
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Net sales
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$
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33.7
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$
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83.7
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Income from discontinued operations, net of taxes
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$
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2.1
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$
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.4
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Restructuring and Severance
In the third quarter and first nine months of 2007, the Company recognized $0.1 million and $0.5 million, respectively, of additional severance expense related to restructuring actions initiated during the third
quarter of 2007 and fourth quarter of 2006.
Financial Resources and Capital Spending
The following table reflects key cash flow measures from continuing operations:
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Nine Months Ended
August 31,
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(Dollars in millions)
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2007
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2006
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Change
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Cash provided by (used) in operating activities
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$
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.5
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$
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(3.8
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)
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$
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4.3
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Cash provided by (used) in investing activities
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$
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2.1
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$
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(8.3
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)
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$
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(10.4
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)
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Cash (used) in provided by financing activities
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$
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(19.8
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)
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$
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8.7
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$
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(28.5
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)
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(Decrease) increase in cash and cash equivalents
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$
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(14.0
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)
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$
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(.3
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)
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$
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(13.7
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)
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Cash provided by operating activities was $0.5 million in the first nine months of 2007, compared to cash
used of $3.8 million in the first nine months of 2006. Cash provided by operations increased in 2007 primarily due to a reduction in the use of working capital as compared to the first nine months of 2006.
In the first nine months of 2007, $2.1 million was provided by investing activities, as compared to $8.3 million used for investing activities in
the first nine months of 2006. During 2007, the Company redeemed $12.4 million of restricted cash in connection with its debt redemption and refinancing, as described in Note D Long-Term Debt. Additionally, the Company incurred $10.3
million of capital expenditures in the first nine months of 2007, compared to $8.3 million in the first nine months of 2006. Capital expenditures were made and are planned principally for asset replacement, new product capability, cost reduction,
safety and productivity improvements and environmental protection. The Company anticipates capital expenditures in 2007 to be approximately $18.0 million. The Company plans to fund substantially all of its capital expenditures from anticipated cash
flow generated from operations during the remainder of the year. If necessary, a portion of capital expenditures will be funded through borrowings under its current credit facility.
Cash used for financing activities in the first nine months of 2007 was $19.8 million compared to cash provided of $8.7 million in the first nine
months of 2006. The first nine months of 2007 includes costs associated with the Companys debt refinancing including $12.4 million for debt redemption expense and a $2.6 million write-off of deferred financing costs. Cash provided by financing
activities in the first nine months of 2006 was primarily related to borrowings under the revolving credit facility. Total debt was $159.6 million as of August 31, 2007, compared to $165.0 million as of November 30, 2006 and $184.4
million as of August 31, 2006.
Long-Term Debt
On May 22, 2007, the Company entered into a $150 million Term Loan Credit Agreement (Term Loan) due May 2014. The Term Loan carries a variable interest rate based on, at the Companys option,
either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base interest rate is a fluctuating rate equal to the higher of the Prime Rate or the sum of the Federal Funds Effective Rate plus 0.50%. The
applicable margin for the alternate base rate is 1.50%. The eurodollar rate is a periodic fixed rate equal to the London Inter Bank Offered Rate (LIBOR). The applicable margin for the eurodollar rate is 2.50%. Annual principal payments
consist of $1.5 million, due in quarterly installments, and annual excess free cash flow payments as defined in the Term Loan agreement, with any remaining balance to be paid May 2014. A required principal payment of $0.4 million was paid on
August 31, 2007. The Company can prepay any amount at any time without penalty upon proper notice and subject to a minimum dollar requirement. The Term Loan is secured by all real property and equipment of the Companys domestic facilities
and stock and equity investments of the Companys non-domestic subsidiaries. The Term Loan contains affirmative and negative covenants, including limitations on additional debt, certain investments and acquisitions outside of the Companys
line of business. The Term Loan requires the Company to maintain a net leverage ratio of less than 5.5 to 1 and at August 31, 2007, the Company was in compliance with this requirement with a ratio of 3.4 at August 31, 2007. The Term Loan
also provides for additional borrowings of up to $75 million, provided that certain requirements are met including an interest coverage ratio and a senior secured leverage ratio. The Company has not utilized these additional borrowings as of
August 31, 2007.
Proceeds of the Term Loan, along with cash, restricted cash
and other resources of the Company, were used to redeem the Companys $165 million 11
1
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% Senior Secured
Notes (Notes). In connection with the redemption of the Notes, the Company paid $9.8 million in premium and tender fees. Additionally, the Company wrote off $2.6 million of unamortized debt issuance costs which were being amortized
over the term of the Notes.
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On May 31, 2007, the Company entered into a fixed rate interest rate swap agreement totaling $50
million to convert a portion of the outstanding term loan from variable to fixed rates. Under this agreement, the Company will pay a fixed rate of 7.73% and receive a variable rate based on LIBOR plus a margin of 2.50%. The variable rate is reset
every three months, at which time the interest will be settled and will be recognized as adjustments to interest expense. This swap agreement is designated as a cash flow hedge, and as such, any resulting gain or loss on the derivative instrument
will be recognized in accumulated other comprehensive income, until it is realized. The fair value of the swap as of August 31, 2007 was a loss of $0.8 million, with a corresponding adjustment to other liabilities.
In connection with the Term Loan, on May 22, 2007 the Company amended its Senior Secured Revolving Credit Facility (Facility). The
Facility was increased to $80 million from $72 million and extended until May 2012. The Facility includes a $15 million sublimit for the issuance of commercial and standby letters of credit and a $10 million sublimit for swingline loans.
Borrowings under the Facility are limited to a borrowing base using customary advance rates for eligible accounts receivable and inventory. Borrowings under the Facility are secured by domestic accounts receivable, inventory and intangible assets.
The Facility contains affirmative and negative covenants, similar to the Term Loan, including limitations on additional debt, certain investments and acquisitions outside of the Companys line of business. If the average excess availability of
the Facility falls below $20 million, the Company must maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement. The Company may request an increase in available borrowings under the Facility of up to $20 million (for
a maximum of $100 million) upon satisfaction of certain requirements. The Company has not utilized these additional borrowings as of August 31, 2007.
Advances under the Facility bear interest, at the Companys option, at either an alternate base rate or a eurodollar rate, in each case plus an applicable margin. The alternate base interest rate is a fluctuating
rate equal to the higher of the Prime Rate or the sum of the Federal Funds Effective Rate plus 0.50%. The applicable margin for the alternate base rate will vary from 0.0% to 0.25% depending on the Companys fixed charge coverage ratio and the
margin was 0.0% at August 31, 2007. The eurodollar rate is a periodic fixed rate equal to LIBOR. The applicable margin for the eurodollar rate will vary from 1.25% to 2.0% depending on the Companys fixed charge coverage ratio and the
margin was 1.5% at August 31, 2007.
The Facility requires a commitment fee based on the unused portion of the Facility. The
commitment fee will vary from 0.125% to 0.25% based on the Companys fixed charge coverage ratio and was 0.125% at August 31, 2007.
At August 31, 2007, the available balance under the Facility, net of outstanding letters of credit and required reserves, was $66.6 million. Borrowings under the Facility were $10.0 million and standby letters of credit outstanding
were $3.4 million as of August 31, 2007.
As of August 31, 2007, the weighted average interest rate on the Companys
outstanding debt was 7.8% as compared to an average rate of 10.8% in 2006. At debt levels and weighted average interest rates, which existed at August 31, 2007, the Companys annualized interest expense savings would be approximately
$6.0 million. As a portion of the interest rates are variable, future interest rates may increase or decrease and the Companys future debt levels may change due to required or voluntary principal payments, therefore, actual interest
expense savings may be materially different.
Based upon current and anticipated levels of operations, the Company believes that its cash
flows from operations, combined with borrowings that will be available under the Facility, will be sufficient to enable the Company to meet its current and anticipated cash operating requirements, including scheduled interest and principal payments,
capital expenditures and working capital needs, for the next twelve months. Currently, the Companys long-term debt bears interest at variable rates except for a portion which has effectively been fixed under an interest rate swap; therefore,
the Companys liquidity and financial condition will continue to be affected by changes in prevailing interest rates.
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Employee Benefit Plans
In April 2007, the Company amended its retiree medical health care plan limiting salaried employee participation to those salaried employees who are eligible to retire as of March 31, 2007 and who retire by
December 31, 2007. As a result, the Company recorded $0.2 million of additional income in the third quarter and expects to record additional income of $0.2 million for this plan in the fourth quarter of 2007 and $0.8 million in 2008.
Significant Accounting Policies and Management Judgments
The Companys discussion and analysis of its results of operations, financial condition and liquidity are based upon the Companys consolidated financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the amounts of assets and liabilities, revenues and expenses and disclosure of
contingent assets and liabilities as of the date of the financial statements. Periodically, the Company reviews its estimates and judgments including those related to product returns, accounts receivable, inventories, warranty obligations,
litigation and environmental reserves, pensions and income taxes. The Company bases its estimates and judgments on historical experience and on various assumptions that it believes to be reasonable under the circumstances. Actual results may differ
materially from these estimates and judgments under different assumptions.
Information with respect to the Companys significant
accounting policies and management judgments which the Company believes could have the most significant effect on the Companys reported results and require subjective or complex judgments by management is contained in Managements
Discussion and Analysis of Financial Condition and Results of Operations of the Companys Annual Report on Form 10-K for the year ended November 30, 2006, as filed with the SEC. The Company has not made any changes in estimates or
judgments that have had a significant effect on the reported amounts.
Environmental Matters
The Companys policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes
significant resources and management attention to compliance with environmental laws and regulations. The Companys Consolidated Balance Sheet as of August 31, 2007 reflects an accrual for environmental remediation of
$0.5 million. The Companys estimates are subject to change and actual results may materially differ from the Companys estimates. Management believes, on the basis of presently available information, that resolution of known
environmental matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect that the ultimate resolution of these matters may have on results of operations cannot be predicted
because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters.
Employee Matters
The Company employs approximately 1,660 employees at offices, plants and other facilities located principally throughout the United States
and the United Kingdom. The Company would generally describe its relationship with employees as good. Approximately 29% or 476 of the Companys employees are covered by collective bargaining agreements. In February 2007, the Company and its
Calhoun, Georgia bargaining unit employees ratified a new three year contract agreement. In May 2007, the Company and its Columbus, Mississippi bargaining unit employees ratified a new three year contract agreement.
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New Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for years beginning after December 15, 2006. This interpretation will be effective for the
Company beginning in the first quarter of 2008. The Company is in the process of determining the impact of this Interpretation on the Companys consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement is effective for years beginning after November 15, 2007. The Company is in the process of
determining the impact of this Statement on the Companys consolidated financial statements.
Effective November 30, 2006, the
Company adopted the recognition provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement
requires employers to recognize in their balance sheets the overfunded or underfunded status of defined benefit post-retirement plans, measured as the difference between the fair value of plan assets and the benefit obligation (the projected benefit
obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). Employers must recognize the change in the funded status of the plan in the year in which the change occurs through other
comprehensive income. This Statement also requires plan assets and obligations to be measured as of the employers balance sheet date. The measurement provision of this Statement will be effective for years beginning after December 15,
2008, with early application encouraged. The Company has not yet adopted the measurement provisions of this Statement and is in the process of determining the impact of the adoption on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115. SFAS No. 159 provides companies with an option to measure, at specified election dates, financial instruments and certain other items at fair value that are not currently measured at
fair value. For those items for which the fair value option is elected, unrealized gains and losses will be recognized in earnings for each subsequent reporting period. SFAS No. 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for fiscal years beginning after November 15, 2007. The Company is in the
process of determining the impact of this Statement on the Companys consolidated financial statements.
Forward-Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements, as defined by federal securities laws, with respect to the
Companys financial condition, results of operations and business, among other things, and include statements based on the Companys current expectations, estimates, forecasts and projections. Words such as, but not limited to,
may, should, projects, forecasts, seeks, believes, expects, anticipates, estimates, intends, plans,
targets, optimistic, likely, will, would, could, and similar expressions or phrases identify forward-looking statements.
All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in business generally and the markets in which
the Company operates. Other risks and uncertainties are more specific to the Companys operations. These risks and uncertainties and the achievement of expected results depends on many factors, some or all of which are not predictable or within
the Companys control. Actual results may differ materially from expected results.
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Factors that may cause actual results to differ materially from expected results include, among others:
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General economic trends affecting the Companys end-use markets;
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Prices and availability of raw materials including styrene, butadiene, vinyl acetate monomer, polyvinyl chloride, acrylics and textiles;
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Ability to increase pricing to offset raw material cost increases;
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Customer and/or competitor consolidation;
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Ability to successfully develop and commercialize new products;
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Customer ability to compete against increased foreign competition;
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Ability to successfully implement productivity enhancement and cost reduction initiatives;
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Operational issues at the Companys facilities;
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The Companys strategic alliance and acquisition activities;
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Acts of war or terrorism, natural disasters or other acts of God;
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Changes in governmental and regulatory policies;
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Compliance with extensive environmental, health and safety laws and regulations;
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Rapid inflation in health care costs and assumptions used in determining health care cost estimates;
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Risks associated with foreign operations including fluctuations in exchange rates of foreign currencies;
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Prolonged work stoppage resulting from labor disputes with unionized workforce;
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Assumptions used in determining pension plan expense and funding, such as return on assets and discount rates and changes in pension funding regulations;
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Adverse litigation judgment and absence of or inadequacy of insurance coverage for such judgment;
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Availability of financing to fund operations at anticipated rates and terms;
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Substantial debt and leverage and the ability to service that debt;
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Significant increase in applicable short-term borrowing rates; and
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Other factors described in Item 1A of the Companys Annual Report on Form 10-K for the year ended November 30, 2006.
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All written and verbal forward-looking statements attributable to the Company or any person acting on the Companys
behalf are expressly qualified in their entirety by the risk factors and cautionary statements contained in Item 1A of the Companys Annual Report on Form 10-K for the year ended November 30, 2006 and herein. Any forward-looking
statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation, and specifically declines any obligation, other than that imposed by law, to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.