NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
As of
August 31, 2017
(Dollars In Millions, Except Share Data)
Note A – Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the OMNOVA Solutions Inc. (“OMNOVA Solutions” or the “Company”) Annual Report on Form 10-K for the year ended
November 30, 2016
, previously filed with the Securities and Exchange Commission (“SEC”).
The financial statements as of
August 31, 2017
have been derived from the unaudited interim consolidated financial statements at that date and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature except as disclosed herein. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could materially differ from those estimates.
The consolidation method is followed to report investments in subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Inter-company accounts and transactions are eliminated during the consolidation process of these accounts.
A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements for the year ended
November 30, 2016
, included in the Company’s Form 10-K filed with the SEC.
Description of Business
– The Company is an innovator of emulsion polymers, specialty chemicals and engineered surfaces for a variety of commercial, industrial and residential end uses. The Company's products provide a variety of important functional and aesthetic benefits to hundreds of products that people use daily. The Company holds leading positions in key market categories, which have been built through innovative products, customized product solutions, strong technical expertise, well-established distribution channels, recognized brands, and long-standing customer relationships. The Company utilizes strategically-located manufacturing, technical and other facilities in North America, Europe, China, and Thailand to service the broad customer base. The Company has two operating segments: Specialty Solutions, which is focused on the Company's higher growth specialty businesses, and Performance Materials, which is focused on the Company’s more mature businesses.
Specialty Solutions
– The Specialty Solutions segment develops, designs, produces, and markets a broad line of specialty polymers for use in coatings, adhesives, sealants, elastomers, laminates, films, nonwovens, and oil & gas products. These products are used in numerous applications, including architectural and industrial coatings; nonwovens used in hygiene products, filtration and construction; drilling additives for oil and gas exploration and production; elastomeric modification of plastic casings and hoses used in household and industrial products and automobiles; tapes and adhesives; sports surfaces; textile finishes; commercial building refurbishment; new construction; residential cabinets; flooring; ceiling tile; furnishings; manufactured housing; health care patient; and common area furniture; and a variety of industrial films applications. The segment's products provide performance enhancing properties to enhance the Company’s customers’ products, including stain, rust and aging resistance; surface modification; gloss; softness or hardness; dimensional stability; high heat and pressure tolerance; and binding and barrier (e.g. moisture, oil) properties.
The Specialty Solutions segment consists of specialty coatings & ingredients, oil & gas, and laminates and films. The specialty coatings & ingredients product line encompasses products that have applications for specialty coatings, nonwovens (such as disposable hygiene products, engine filters, roofing mat, and scrub pads), construction, adhesives, sealants, tape, floor care, textiles, graphic arts, and various other specialty applications. Oil & gas applications include drilling fluid additives, which provide fluid loss control and sealing to enhance welborne integrity, as well as cement additives for gas migration and fluid loss. The laminates and performance films product line applications include kitchen and bath cabinets, wall surfacing, manufactured housing and recreational vehicle interiors, flooring, commercial and residential furniture, retail display fixtures, home furnishings, commercial appliances, and a variety of industrial film applications.
Performance Materials
– The Performance Materials segment serves mature markets with a broad range of emulsion polymers based primarily on styrene butadiene (SB), styrene butadiene acrylonitrile (SBA), styrene butadiene vinyl pyridine, high styrene pigments, polyvinyl acetate, acrylic, styrene acrylic, calcium stearate, glyoxal, and bio-based chemistries. Performance Materials' custom-formulated products are tailored latexes, resins, binders, antioxidants, hollow plastic pigment, coated fabrics, and rubber reinforcing which are used in tire cord, polymer stabilization, industrial rubbers, carpet, paper, and various other applications. Its products provide a variety of functional properties to enhance the Company’s customers’ products, including greater strength, adhesion, dimensional stability, ultraviolet resistance, improved processibility, and enhanced appearance.
The Performance Materials segment encompasses performance additives, paper, carpet, and coated fabrics. This segment encompasses products that have applications in the paper, paperboard, carpet, polymer stabilization, industrial rubbers, and tire cord industries. Paper and paperboard coatings are used in magazines, catalogs, direct mail advertising, brochures, printed reports, food cartons, household, and other consumer and industrial packaging. Carpet binders are used to secure carpet fibers to carpet backing and meet stringent manufacturing, environmental, odor, flammability, and flexible installation requirements. Tire cord is used in automotive tires. The coated fabrics product line applications include upholstery used in refurbishment and new construction for the commercial office, hospitality, health care, retail, education and restaurant markets, marine and transportation seating, commercial and residential furniture, automotive soft tops, and automotive after-market applications.
Reclassifications and immaterial error correction
- Certain amounts in the prior years have been reclassified to conform to current year presentation. During the quarter ended August 31, 2017, we identified and corrected an immaterial presentation error in the Consolidated Statement of Comprehensive Income and related Note F - Comprehensive Income (Loss) footnote disclosure for the nine months ended August 31, 2016. The Company previously presented a
$5.9 million
favorable realized net change during the period in foreign currency translation in the aggregate with unfavorable unrealized net change during the period in foreign currency translation within a single caption within the Statement of Comprehensive income titled Unrealized net change during the period. In order to correct this prior period presentation error, the Company has presented
$5.9 million
in the nine month period within a new caption within the Statement of Comprehensive Income titled Realized net change during the period and has corrected the amount presented under the caption Unrealized net change during the period, which now totals to a
$1.5 million
unfavorable net change. The total of foreign currency translation, net of tax, was not impacted and no other line items within any of the other consolidated financial statements and footnotes were impacted.
Accounting Standards Adopted in 2017
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption was permitted. ASU 2016-09 was adopted by the Company effective December 1, 2016.
This guidance requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and also requires a policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company changed its policy to recognize the impact of forfeitures when they actually occur, and recognized a cumulative effect adjustment to retained earnings on a modified retrospective basis as of December 1, 2016. Also, this guidance requires cash paid by an employer when directly withholding shares for tax withholding purposes to be classified in the Consolidated Statement of Cash Flows as a financing activity, which differs from the Company's previous method of classification of such cash payments as an operating activity. The Company applied this provision retrospectively, and beginning in the first quarter of 2016, reclassified amounts from operating activities to financing activities. This guidance also requires the tax effects of exercised or vested awards to be treated as discrete items in the reporting period in which they occur, which was applied prospectively by the Company, beginning December 1, 2016. Lastly, the guidance requires that excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as cash inflows from financing activities. The Company elected to apply this provision using the prospective transition method.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which expands upon the guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. ASU 2015-03 was adopted by the Company effective December 1, 2016 resulting in debt issuance costs, which were previously presented as debt issuance costs, being presented as a direct deduction to the Company's long-term debt, less current portion in the Consolidated Balance Sheet. Refer to the Debt footnote for additional details.
Accounting Standards Not Yet Adopted
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits, which require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this Update also allow only the service cost component to be
eligible for capitalization when applicable. ASU 2017-07 must be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. This guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which is intended to simplify the current test for goodwill impairment by eliminating the second step in which the implied value of a reporting unit is calculated when the carrying value of the reporting unit exceeds its fair value. Under ASU 2017-04, goodwill impairment should be recognized for the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 must be applied prospectively and is effective for any annual or interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated results of operations, financial position or cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations, which clarified existing guidance on the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods, including interim periods within those periods. Early adoption is permitted and the guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company does not expect the adoption of this guidance to have a material impact on its consolidated results of operations, financial position, or cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which amends existing guidance related to the recognition of current and deferred income taxes for intra-entity asset transfers. Under the new guidance, current and deferred income tax consequences of an intra-entity asset transfer, other than an intra-entity asset transfer of inventory, are now recognized when the transfer occurs. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted as of the beginning of the annual reporting period in which the ASU was issued. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments, which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The adoption of this ASU will not have an impact on the Company's financial position, results of operations, or cash flows.
In June 2016, the the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decrease of expected credit losses that have taken place during the period. This ASU changes the impairment model for most financial assets and certain other instruments, which will result in earlier recognition of allowances for losses. The guidance requires a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Early adoption is permitted for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. The new guidance is effective for the Company’s fiscal year that begins on December 1, 2019 and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10: Recognition and Measurement of Financial Assets and Financial Liabilities), which revised entities’ accounting related to: (i) the classification and measurement of investments in equity securities; and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new guidance is effective for the Company’s fiscal year that begins on December 1, 2018 and requires a modified retrospective approach to adoption. Early adoption is only permitted for the provision related to instrument-specific credit risk. The Company is currently evaluating the potential impact on its Consolidated Financial Statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company continues to assess the potential impact of the standard and has evaluated a sampling of significant contracts. The Company has not yet reached a conclusion as to how the adoption of the standard will impact the Company's financial position, results of operations or cash flows.
Note B – Fair Value Measurements and Risk
Financial Risk Management Objectives and Policies
The Company is exposed primarily to credit, interest rate, and foreign currency rate risks, which arise in the normal course of business.
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations with the Company as and when they fall due. The primary credit risk for the Company is its accounts receivable, which are generally unsecured. The Company has established credit limits for customers and monitors their balances to mitigate its risk of loss. Concentrations of credit risk with respect to accounts receivable are generally limited due to the wide variety of customers and markets using the Company's products. During the three and nine-month periods ending
August 31, 2017
, there was one customer that represented approximately
10%
of the Company’s net sales and there was no single customer who represented more than 10% of the Company’s net trade receivables at
August 31, 2017
.
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s
$350.0 million
Term Loan B (balance of
$346.5 million
at
August 31, 2017
) and various foreign subsidiary borrowings, which bear interest at variable rates, approximating market interest rates. The Term Loan B has a LIBOR floor of
1.00%
, which eliminates the variability in interest rate changes on Eurodollar loans as long as LIBOR remains under
1.00%
. As of
August 31, 2017
, LIBOR was slightly above
1.00%
, which had a slight impact on the Company's interest expense.
Foreign Currency Rate Risk
The Company incurs foreign currency rate risk on sales and purchases denominated in other than the functional currency. The currencies giving rise to this risk are primarily the Euro, Great Britain Pound Sterling, Renminbi, Singapore Dollar, and Thai Baht.
Foreign currency exchange contracts are used by the Company to manage risks from the change in market exchange rates on cash payments by the Company's foreign subsidiaries and U.S. Dollar cash holdings in foreign locations. These forward contracts are used on a continuing basis for periods of approximately thirty days, consistent with the underlying hedged transactions. Hedging limits the impact of foreign exchange rate movements on the Company’s operating results. The counterparties to these instruments are investment grade financial institutions and the Company does not anticipate any non-performance. The Company maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased or sold for trading purposes. These contracts are not designated as hedging instruments and changes in fair value of these instruments are recognized in earnings immediately. Net gains on foreign currency contracts that were recorded in the Consolidated Statements of Operations, as a component of other income, for the
nine
-month period ending
August 31, 2017
were
$1.0 million
. Net gains (losses) on foreign currency contracts for the three and
nine
month periods ending
August 31, 2016
were not material.
Derivative Instruments
The Company recognizes the fair value of qualifying derivative instruments as either an asset or a liability within its statement of financial position. For derivative instruments not designated as hedges, the change in fair value of the derivative is recognized in earnings each reporting period. The Company defines fair value as the price that would be received to transfer an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a hierarchy of valuation inputs to measure fair value.
The hierarchy prioritizes the inputs into three broad levels:
Level 1 inputs—Quoted market prices in active markets for identical assets or liabilities.
Level 2 inputs—Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 inputs—Unobservable inputs that are not corroborated by market data.
The fair value of derivative financial instruments recognized in the Consolidated Statements of Financial Position are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Notional Amount
|
|
Other Current Assets
|
|
Other Current Liabilities
|
Derivatives - August 31, 2017
|
|
|
|
|
|
Currency forward contracts
|
$
|
16.5
|
|
|
$
|
.2
|
|
|
$
|
—
|
|
Total
|
$
|
16.5
|
|
|
$
|
.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Derivatives - November 30, 2016
|
|
|
|
|
|
Currency forward contracts
|
$
|
7.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
7.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fair Value Measurements
The Company uses the market approach and the income approach to value assets and liabilities as appropriate. The following financial assets and liabilities are measured and presented at fair value on a recurring basis as of
August 31, 2017
and
November 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Fair value measurements - August 31, 2017:
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
$
|
.2
|
|
|
$
|
.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
.2
|
|
|
$
|
.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.7
|
|
Total liabilities
|
$
|
.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
.7
|
|
|
|
|
|
|
|
|
|
Fair value measurements - November 30, 2016:
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
In connection with the Creole acquisition, the Company recorded a contingent consideration liability with a fair value of
$0.7 million
as of August 31, 2017. Under the contingent consideration agreement, the amounts to be paid are based upon actual financial results of the acquired product sales over a two-year period. The fair value of the contingent consideration is a Level 3 valuation and fair valued using a probability weighted discounted cash flow analysis. There were no transfers into or out of Level 3 during the
first nine months
of
2017
or
2016
.
The fair value of the Company’s Term Loan at
August 31, 2017
approximated
$349.1 million
, which is
more
than its book value of
$346.5 million
as a result of prevailing market rates on the Company’s debt. The carrying value of amounts due banks approximates fair value due to their short-term nature. The fair value of the Term Loan is based on market price information and is measured using the last available trade of the instrument on a secondary market in each respective period and therefore is considered a Level 2 measurement. The fair value is not indicative of the amount that the Company would have to pay to redeem these instruments since they are infrequently traded and are not callable at this value. The fair value of the Company's capital lease obligation approximates its carrying amount based on estimated borrowing rates to discount the cash flows to their present value.
Note C - Restructuring and Severance
The following table is a summary of severance and facility closure costs for the
three
and
nine months ended August 31, 2017 and 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
Nine Months Ended August 31,
|
(Dollars in Millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Severance Expense:
|
|
|
|
|
|
|
|
Specialty Solutions
|
$
|
—
|
|
|
$
|
.1
|
|
|
$
|
.6
|
|
|
$
|
.2
|
|
Performance Materials
|
.3
|
|
|
.3
|
|
|
1.7
|
|
|
2.8
|
|
Corporate
|
—
|
|
|
—
|
|
|
2.6
|
|
|
.1
|
|
Total Severance
|
$
|
.3
|
|
|
$
|
.4
|
|
|
$
|
4.9
|
|
|
$
|
3.1
|
|
Facility Closure Costs:
|
|
|
|
|
|
|
|
Specialty Solutions
|
$
|
—
|
|
|
$
|
.3
|
|
|
$
|
—
|
|
|
$
|
.1
|
|
Performance Materials
|
.1
|
|
|
.6
|
|
|
.2
|
|
|
1.7
|
|
Total Facility Closure Costs
|
$
|
.1
|
|
|
$
|
.9
|
|
|
$
|
.2
|
|
|
$
|
1.8
|
|
Total Severance and Facility Closure Costs
|
$
|
.4
|
|
|
$
|
1.3
|
|
|
$
|
5.1
|
|
|
$
|
4.9
|
|
During 2017, the Company initiated a restructuring and severance plan which included headcount reductions. The plan was initiated to better align the cost structure with economic conditions and operational needs and affected approximately
40
positions. The Company does not anticipate any additional charges related to the completion of these plans and expects these costs to be paid by the end of fiscal 2017.
During 2016, the Company initiated a restructuring and severance plan related to the closing of manufacturing operations of the Calhoun, GA plant. The Company does not anticipate any additional charges related to the completion of these plans and expects these costs to be paid by the end of fiscal 2017.
The following table summarizes the Company's liabilities related to restructuring and severance activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2016
|
|
2017
|
|
August 31, 2017
|
(Dollars in millions)
|
Provision
|
|
Payments
|
|
Total
|
$
|
4.2
|
|
|
$
|
5.1
|
|
|
$
|
7.5
|
|
|
$
|
1.8
|
|
The Company expects to incur future costs related to its restructuring activities, as processes are continually evaluated to enhance the efficiency and cost effectiveness of its operations, and to ensure competitiveness across its businesses and across geographic areas. Future costs are expected to include costs related to closed facilities and restructuring plan implementation costs and these will be recognized as incurred.
Note D – Income Taxes
The Company recorded income tax expense of
$6.1 million
and
$1.9 million
for the
three months ended August 31, 2017 and 2016
, respectively, and income tax expense of
$7.0 million
and
$5.4 million
for the nine months ended August 31, 2017 and 2016, respectively. The increase in tax expense for the third quarter of 2017, compared to the third quarter of 2016, primarily relates to increased pre-tax earnings of approximately $7.4 million. The Company's effective tax rate of
43.6%
for the
three months ended August 31, 2017
was higher than the U.S. federal statutory rate primarily due to losses in jurisdictions in which no tax benefit was recognized. The effective tax rate of
57.9%
for the first nine months of 2017 was higher than the
Company’s U.S. federal statutory rate primarily due to a foreign impairment recorded in the second quarter of 2017 for which no tax benefit was recognized.
The total unrecognized tax benefits were
$0.3 million
as of August 31, 2017 and November 30, 2016. Of the total unrecognized tax benefits at August 31, 2017,
$0.1 million
would, if recognized, impact the Company's effective tax rate. There were minimal interest and penalties recognized in the Statement of Financial Position at August 31, 2017 and November 30, 2016.
Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense. The Company recognized minimal income tax expense related to interest and penalties as of August 31, 2017 and November 30, 2016.
The Company had approximately
$98.9 million
and
$92.0 million
of U.S. federal net operating loss carryforwards ("NOLCs") as of August 31, 2017 and November 30, 2016, respectively. The increase in the U.S. federal NOLCs is due to the recognition of windfall tax benefits as required under ASU 2016-09 which was adopted effective December 1, 2016. The Company also had
$108.7 million
of state and local NOLCs,
$0.1 million
of foreign tax credit carryforwards and
$0.7 million
of AMT credit carryforwards. The
$108.7 million
of state and local NOLCs have a realizable deferred tax asset value of
$3.8 million
. During the year ended November 30, 2016, the Company utilized approximately
$15.6 million
of federal NOLCs. During the
three months ended August 31, 2017
, the Company incurred an
$8.6 million
U.S. federal capital loss as result of a stock sale of a foreign subsidiary. Presently, the Company does not anticipate utilizing the capital loss prior to its expiration and an offsetting valuation allowance was recorded. The majority of the federal, state and local NOLCs expire in tax years
2023
through
2034
, while the foreign tax credit carryforwards expire between tax years
2017
and
2022
, and the capital loss will expire in tax year
2022
. As of August 31, 2017, the Company had approximately
$48.0 million
of foreign NOLCs, of which
$42.9 million
have an indefinite carryforward period. Of the
$42.9 million
foreign NOLCs which have an indefinite carryforward period,
$34.1 million
have a valuation allowance provided against them, as the Company presently does not anticipate utilizing these carryforwards.
With limited exceptions, the Company is no longer open to audit by the Internal Revenue Service and various states and foreign taxing jurisdictions for years prior to 2012.
The Company has not provided for 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.
Note E – Income (Loss) Per Share
The Company presents both basic and diluted earnings per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS is calculated by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the reporting period that are calculated using the treasury stock method for stock-based awards. The treasury stock method assumes that the Company uses the proceeds from the exercise of awards to repurchase common shares at the average market price during the period.
The following table sets forth the computation of earnings per common share and fully diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
Nine Months Ended August 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7.9
|
|
|
$
|
4.7
|
|
|
$
|
5.1
|
|
|
$
|
10.8
|
|
|
|
|
|
|
|
|
|
|
Denominator
(shares in millions)
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average shares outstanding
|
|
44.4
|
|
|
44.1
|
|
|
44.3
|
|
|
44.0
|
|
Effect of dilutive securities
|
|
.3
|
|
|
.6
|
|
|
.4
|
|
|
.4
|
|
Denominator for dilutive earnings per share - adjusted weighted average shares and assumed conversions
|
|
44.7
|
|
|
44.7
|
|
|
44.7
|
|
|
44.4
|
|
|
|
|
|
|
|
|
|
|
Income Per Share - Basic
|
|
$
|
.18
|
|
|
$
|
.11
|
|
|
$
|
.12
|
|
|
$
|
.25
|
|
Income Per Share - Diluted
|
|
$
|
.18
|
|
|
$
|
.10
|
|
|
$
|
.11
|
|
|
$
|
.24
|
|
Anti-dilutive share equivalents related to share-based incentive compensation were immaterial and are excluded from the computation of dilutive weighted-average shares.
Note F – Comprehensive Income (Loss)
The following tables reflect the changes in the components of accumulated other comprehensive loss (net of tax) for the three and
nine
months ended
August 31, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31, 2017 and 2016
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
Balance May 31, 2017
|
$
|
(24.0
|
)
|
|
$
|
(107.8
|
)
|
|
$
|
(131.8
|
)
|
Other comprehensive income (loss) before reclassifications
|
7.3
|
|
|
(.2
|
)
|
|
7.1
|
|
Amounts reclassified to earnings
(a)
|
(6.3
|
)
|
|
.9
|
|
|
(5.4
|
)
|
Balance August 31, 2017
|
$
|
(23.0
|
)
|
|
$
|
(107.1
|
)
|
|
$
|
(130.1
|
)
|
|
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
Balance May 31, 2016
|
$
|
(22.4
|
)
|
|
$
|
(104.6
|
)
|
|
$
|
(127.0
|
)
|
Other comprehensive income (loss) before reclassifications
|
(1.1
|
)
|
|
—
|
|
|
(1.1
|
)
|
Amounts reclassified to earnings
|
—
|
|
|
.6
|
|
|
.6
|
|
Balance August 31, 2016
|
$
|
(23.5
|
)
|
|
$
|
(104.0
|
)
|
|
$
|
(127.5
|
)
|
|
Nine months ended August 31, 2017 and 2016
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
Balance - November 30, 2016
|
$
|
(29.5
|
)
|
|
$
|
(108.9
|
)
|
|
$
|
(138.4
|
)
|
Other comprehensive income (loss) before reclassifications
|
12.8
|
|
|
(.2
|
)
|
|
12.6
|
|
Amounts reclassified to earnings
(a)
|
(6.3
|
)
|
|
2.0
|
|
|
(4.3
|
)
|
Balance August 31, 2017
|
$
|
(23.0
|
)
|
|
$
|
(107.1
|
)
|
|
$
|
(130.1
|
)
|
|
|
Foreign Currency Items
|
|
Defined Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
Balance - November 30, 2015
|
$
|
(30.2
|
)
|
|
$
|
(105.7
|
)
|
|
$
|
(135.9
|
)
|
Other comprehensive income (loss) before reclassifications
|
12.8
|
|
|
(.2
|
)
|
|
12.6
|
|
Amounts reclassified to earnings
|
(6.1
|
)
|
|
1.9
|
|
|
(4.2
|
)
|
Balance August 31, 2016
|
$
|
(23.5
|
)
|
|
$
|
(104.0
|
)
|
|
$
|
(127.5
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) related to defined benefit plans were included in net periodic benefit expense.
(a) Amounts reclassified to earnings for Defined Benefit Plans includes $0.4 million of settlement expense which occurred during the third quarter of 2017.
Note G – Inventories
Inventories are stated at the lower of cost or market value. Certain U.S. inventories are valued using the last-in, first-out (“LIFO”) method and represented approximately
$44.5 million
, or
45.6%
, and
$46.4 million
, or
49.7%
, of inventories at
August 31, 2017
and
November 30, 2016
, respectively. The remaining portion of inventories (which are primarily located outside of the U.S.) are valued using costing methods that approximate the first-in, first-out (“FIFO”) or average cost methods. Interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to final year-end LIFO inventory valuations. Inventory costs include material, labor, and overhead. Inventories, net, consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
August 31, 2017
|
|
November 30, 2016
|
Raw materials and supplies
|
$
|
31.6
|
|
|
$
|
30.6
|
|
Work-in-process
|
6.1
|
|
|
4.7
|
|
Finished goods
|
59.9
|
|
|
58.2
|
|
Inventories, gross
|
97.6
|
|
|
93.5
|
|
LIFO reserve
|
(13.3
|
)
|
|
(12.9
|
)
|
Obsolescence reserve
|
(7.1
|
)
|
|
(6.6
|
)
|
Inventories, net
|
$
|
77.2
|
|
|
$
|
74.0
|
|
Note H – Debt and Credit Lines
Debt obligations due within the next twelve months consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
August 31, 2017
|
|
November 30, 2016
|
$350 million Term Loan B – current portion (interest at 5.48% and 5.25%, respectively)
|
$
|
3.5
|
|
|
$
|
3.5
|
|
Capital lease obligations
|
.7
|
|
|
.7
|
|
Total
|
$
|
4.2
|
|
|
$
|
4.2
|
|
The Company maintains borrowing facilities at certain of its foreign subsidiaries, which consist of working capital credit lines and facilities for the issuance of letters of credit. Total borrowing capacity for foreign working capital credit lines and letters of credit facilities were
$6.9 million
at
August 31, 2017
all of which was available for utilization and
$6.6 million
at
November 30, 2016
of which
$6.5 million
was available for utilization. These letters of credit support commitments made in the ordinary course of business.
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
August 31, 2017
|
|
November 30, 2016
|
$350 million Term Loan B (interest at 5.48% and 5.25%, respectively)
|
$
|
346.5
|
|
|
$
|
349.2
|
|
Capital lease obligations
|
16.4
|
|
|
16.8
|
|
Total Long-Term Debt
|
362.9
|
|
|
366.0
|
|
Less: current portion
|
(4.2
|
)
|
|
(4.2
|
)
|
Unamortized original issue discount
|
(2.9
|
)
|
|
(3.4
|
)
|
Debt issuance costs
|
(5.5
|
)
|
|
(5.9
|
)
|
Total Long-Term Debt, net of current portion and deferred financing fees
|
$
|
350.3
|
|
|
$
|
352.5
|
|
The Company's U.S. debt facilities include a
$350 million
Term Loan B ("Term Loan B") and a Senior Revolving Credit Facility (“Facility”). The Term Loan B was issued at a discount of
$3.5 million
which is reflected as unamortized original issue discount.
The weighted-average interest rate on the Company’s debt was
5.38%
and
5.80%
during the
third
quarters of
2017
and
2016
, respectively.
For a detailed discussion of the Company's long-term debt agreements, refer to the Debt footnote in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2016.
Term Loan
The Company's
$350 million
Term Loan B matures on August 26, 2023. The Term Loan B is primarily secured by all real property, plant, and equipment of the Company's U.S. facilities and fully and unconditionally and jointly and severally guaranteed by the material U.S. subsidiaries of the Company. The Term Loan B contains affirmative and negative covenants, including limitations on additional debt, certain investments, and acquisitions outside of the Company’s line of business. The Term Loan B requires the Company to maintain a total net leverage ratio of less than
5.0
to 1.0. The Company is in compliance with this covenant with a total net leverage ratio of
3.4
to 1.0 at
August 31, 2017
.
Senior Revolving Credit Facility
The Company also maintains a Senior Revolving Credit Facility (the "Facility") which matures on
August 26, 2021
. The Facility is secured by U.S. accounts receivable, inventory (collectively the “Eligible Borrowing Base”) and intangible assets. The Facility contains affirmative and negative covenants, similar to the Term Loan B, including limitations on additional debt, certain investments and acquisitions outside of the Company’s line of business. If the average excess availability of the Facility falls below
$25 million
during any fiscal quarter, the Company must then maintain a fixed charge coverage ratio greater than
1.1
to 1.0 as defined in the agreement. The Company was in compliance with this requirement as the average excess availability did not fall below
$25 million
during the
third
quarter of
2017
.
At
August 31, 2017
, there were no amounts borrowed under the Facility and the amount available for borrowing under the Facility was
$72.6 million
.
Capital Lease Obligations
At
August 31, 2017
, the Company had assets under capital leases totaling
$16.4 million
, which are included in property, plant, and equipment in the accompanying Statements of Financial Position.
The following is a schedule by year of future minimum lease payments under the Company's capital lease together with the present value of the net future minimum lease payments as of
August 31, 2017
:
|
|
|
|
|
Year Ending November 30:
|
(Dollars in millions)
|
2017
|
$
|
.4
|
|
2018
|
1.4
|
|
2019
|
1.5
|
|
2020
|
1.5
|
|
2021
|
1.5
|
|
Thereafter
|
18.0
|
|
Total future minimum lease payments
|
24.3
|
|
Less: Amount representing estimated executory costs
|
(.6
|
)
|
Net future minimum lease payments
|
23.7
|
|
Less: Amount representing interest
|
(7.3
|
)
|
Present value of future minimum lease payments
|
$
|
16.4
|
|
Debt Issuance Costs and Original Issue Discounts
Debt issuance costs and original issue discounts incurred in connection with the issuance of the Company's debt are being amortized over the respective terms of the underlying debt, including any amendments. Total amortization expense of debt issuance costs and original issue discounts is included as a component of interest expense and was
$0.4 million
and
$0.5 million
, and
$1.1 million
and
$1.4 million
, for the
three
and
nine months ended August 31, 2017 and 2016
, respectively.
Note I – Share-Based Employee Compensation
The Company provides compensation benefits to employees under the OMNOVA Solutions 2017 Equity Incentive Plan (the “Plan”), which was approved by shareholders on March 22, 2017. The Plan permits the Company to grant to officers, key employees and non-employee directors of the Company, incentives directly linked to the price of OMNOVA Solutions’ common shares. The Plan authorizes the issuance of Company common shares in the aggregate for (a) awards of options rights to purchase Company common shares, (b) performance shares and performance units, (c) restricted shares, (d) restricted share units, or (e) appreciation rights. Shares granted under the Plan may be either newly issued shares or treasury shares or both. As of
August 31, 2017
, approximately
2.5 million
Company common shares remained available for grants under the Plan. All options granted under the Plan are granted at exercise prices equal to the market value of the Company’s common shares on the date of grant. Additionally, the Plan provides that the term of any option granted under the Plan may not exceed
10 years
. Prior to March 22, 2017, the Company granted equity compensation under the OMNOVA Solutions Third Amended and Restated 1999 Equity and Performance Incentive Plan, which had substantially similar features.
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period). The fair value of Restricted Share Awards ("RSA's") and Restricted Share Units ("RSU's") is determined based on the closing market price of the Company’s ordinary shares at the date of grant. RSU's entitle the holder to receive one ordinary share for each RSU at vesting, generally three years after the date of grant. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
In accordance with the adoption of ASU 2016-09, the Company recognized a cumulative effect adjustment to retained earnings of
$2.8 million
in the Consolidated Financial Statements as of December 1, 2016 related to the recognition of deferred tax assets attributable to unrecognized windfall tax benefits.
Compensation expense for all share-based payments included in general and administrative expense was
$1.6 million
and
$1.8 million
for the
first nine months
of
2017
and
2016
, respectively.
As of
August 31, 2017
, there was
$2.4 million
of unrecognized compensation cost related to non-vested share-based compensation arrangements.
A summary of the RSA and RSU activity for 2017 follows:
|
|
|
|
|
|
|
|
|
Restricted Share Awards & Units
|
|
Weighted-Average Grant Date Fair Value per Share
|
Nonvested at December 1, 2016
|
1,008,150
|
|
|
$
|
7.23
|
|
Granted
|
120,100
|
|
|
8.65
|
|
Vested
|
(574,450
|
)
|
|
7.47
|
|
Canceled and Forfeited
|
(16,150
|
)
|
|
7.44
|
|
Nonvested at August 31, 2017
|
537,650
|
|
|
$
|
6.98
|
|
The Company also provides employees the opportunity to purchase Company common shares through payroll deductions under the OMNOVA Solutions Employee Share Purchase Plan (the "ESPP"). Under the ESPP, eligible employees receive a
15%
discount from the trading value of common shares purchased. The purchase price for common shares purchased from the Company will be
85%
of the closing price of the common shares on the New York Stock Exchange ("NYSE") on the investment date. Participants may contribute funds to the ESPP, not to exceed twenty-five thousand dollars in any calendar year. If a participant terminates his or her employment with the Company or its subsidiaries, the participant's participation will immediately terminate, uninvested funds will be remitted to the participant and the participant's account will be converted to a regular brokerage account. As of
August 31, 2017
, the amount of shares held by eligible participants through the ESPP was not material.
Note J – Employee Benefit Plans
The Company maintains a number of defined benefit plans to provide retirement benefits for employees. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”), local statutory law, or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. The pension plans are funded except for a U.S. non-qualified pension benefit restoration plan for certain key employees and certain foreign plans. Future service benefits are frozen for all participants under the Company's U.S. defined benefit plan. All benefits earned by affected employees through the dates on which such benefits were frozen have become fully vested with the affected employees eligible to receive benefits upon retirement, as described in the Plan document. The following table sets forth the components of net periodic benefit costs for the Company’s retirement programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Pension
Plans
|
|
Health Care
Plans
|
Three months ended August 31, 2017 and 2016
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service costs
|
$
|
.7
|
|
|
$
|
.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest costs
|
2.3
|
|
|
2.4
|
|
|
.1
|
|
|
.1
|
|
Expected return on plan assets
|
(3.8
|
)
|
|
(3.8
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss (gain)
|
1.2
|
|
|
1.2
|
|
|
(.3
|
)
|
|
(.3
|
)
|
Settlement loss
|
.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic cost (benefit)
|
$
|
.8
|
|
|
$
|
.3
|
|
|
$
|
(.2
|
)
|
|
$
|
(.2
|
)
|
|
(Dollars in Millions)
|
Pension
Plans
|
|
Health Care
Plans
|
Nine months ended August 31, 2017 and 2016
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service costs
|
$
|
2.1
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest costs
|
6.9
|
|
|
7.2
|
|
|
.3
|
|
|
.3
|
|
Expected return on plan assets
|
(11.4
|
)
|
|
(11.4
|
)
|
|
—
|
|
|
—
|
|
Amortization of net actuarial loss (gain)
|
3.5
|
|
|
3.5
|
|
|
(.9
|
)
|
|
(.9
|
)
|
Settlement loss
|
.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic cost (benefit)
|
$
|
1.5
|
|
|
$
|
.8
|
|
|
$
|
(.6
|
)
|
|
$
|
(.6
|
)
|
The Company made
$6.0 million
of contributions to its pension plan trusts during the
first nine months
of fiscal
2017
and expects full year contributions of approximately
$7.4 million
during fiscal
2017
. The settlement expense recognized during the third quarter of 2017 is due to the exit of certain individuals under the non-qualified pension benefit restoration plan.
The Company also sponsors a defined contribution 401(k) plan. Participation in this plan is voluntary and is available to substantially all U.S. salaried employees and to certain groups of U.S. hourly employees. Company contributions to this plan are based on either a percentage of employee contributions or on a specified percentage of employee compensation based on the provisions of the applicable collective bargaining agreement. Company contributions are made in cash. Expense for this plan was
$0.6 million
and
$2.2 million
for the
third
quarter and the
first nine months
of
2017
, respectively, and
$0.7 million
and
$2.1 million
for the
third
quarter and the
first nine months
of
2016
, respectively.
Note K – Contingencies
From time to time, the Company is subject to various claims, proceedings, and lawsuits related to products, services, contracts, employment, environmental, safety, intellectual property, and other matters. The ultimate resolution of such claims, proceedings, and lawsuits is inherently unpredictable and, as a result, the Company’s estimates of liability, if any, are subject to change. Actual results may materially differ from the Company’s estimates and an unfavorable resolution of any matter could have a material adverse effect on the financial condition, results of operations, and/or cash flows of the Company. However, subject to the above and taking into account such amounts, if any, as are accrued from time to time on the Company’s balance sheet, the Company does not believe, based on the information currently available to it, that the ultimate resolution of these matters will have a material effect on the consolidated financial condition, results of operations or cash flows of the Company.
Note L – Business Segment Information
The Company's two operating segments, Specialty Solutions and Performance Materials, are based on products and services provided as defined under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280, Segment Reporting, and based on how its Chief Operating Decision Maker, its CEO, evaluates performance and allocates resources. Accounting policies of the segments are the same as the Company’s accounting policies. The Company’s operating segments are strategic business units that offer different products and services, and are managed separately based on certain differences in their technology, marketing strategies and end use markets. As announced during January 2017 during the second quarter of fiscal 2017, the Company realigned it's product lines within these business segments. Accordingly, prior year segment results have been modified to conform to the revised segment presentation.
Segment operating profit represents net sales less applicable costs, expenses and provisions for restructuring and severance costs, asset write-offs, and other items. Segment operating profit excludes unallocated corporate headquarters expenses, provisions for corporate headquarters, corporate restructuring and severance, interest expense, and income taxes. Corporate headquarters expense includes the cost of providing and maintaining the corporate headquarters functions (including salaries, rent, travel, and entertainment expenses), depreciation, utility costs, outside services, and other costs.
The following table sets forth a summary of operations by segment and a reconciliation of segment sales to consolidated sales and segment operating profit to consolidated income (loss) before income taxes:
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Three Months Ended August 31,
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Nine Months Ended August 31,
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(Dollars in Millions)
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2017
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2016
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2017
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2016
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Net sales
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Specialty Solutions
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$
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115.1
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$
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107.1
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$
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330.3
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$
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302.9
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Performance Materials
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85.8
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88.5
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266.5
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270.0
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Total net sales
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$
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200.9
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$
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195.6
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$
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596.8
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$
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572.9
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Segment operating profit
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Specialty Solutions
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$
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18.9
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$
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16.9
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$
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45.6
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$
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47.6
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Performance Materials
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8.3
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4.3
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5.8
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8.6
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Total segment operating profit
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27.2
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21.2
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51.4
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56.2
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Interest expense
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(5.5
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)
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(5.9
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)
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(16.0
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)
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(17.4
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)
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Corporate expense
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(7.5
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)
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(6.6
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)
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(23.1
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)
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(20.9
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)
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Operational improvement costs
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—
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—
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—
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.4
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Acquisition and integration costs
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(.2
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)
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(.4
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)
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(.2
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)
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(.4
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)
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Debt issuance costs write-off
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—
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(1.7
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)
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—
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(1.7
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)
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Income (loss) before income taxes
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$
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14.0
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$
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6.6
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$
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12.1
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$
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16.2
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Note M - Acquisitions
On March 13, 2017, the Company acquired the assets of Creole Chemicals, Inc., a producer of specialty oilfield additives based in Houston, Texas. This acquisition allows the Company to accelerate growth, round out its existing offerings and broaden its solutions portfolio in the oil and gas product line. Assets acquired included inventory and intellectual property. The Company paid
$2.5 million
cash, exclusive of contingent consideration that will be based on future profitability of acquired product sales over a two year period. The acquisition date fair value of the contingent consideration was
$0.7 million
.
Note N - Sale of Assets
In late May 2017, Management approved a plan for the Company to sell its China coated fabrics manufacturing operations. As a result, during the second quarter of 2017, the Company determined that the disposal group was impaired and recognized an impairment charge of
$12.9 million
, of which
$11.8 million
was included in the results of the Performance Materials segment and
$1.1 million
was included in Corporate expenses. Included in the calculation of the impairment charge are deferred foreign currency translation gains of
$6.3 million
, which were previously recorded in accumulated other comprehensive income ("AOCI"). The Company completed the planned sale in July 2017, and recognized an additional loss on the sale of $
0.4 million
, for a total loss of
$13.3 million
. The Company will continue to manufacture and sell coated fabric products in the Asian region. Management considered other qualitative and quantitative factors and concluded this sale did not represent a strategic shift in business.
The Company classifies assets and liabilities as held for sale when management, having the authority to approve the action, commits to a plan to sell a group of assets, the sale is probable within one year, and the asset group is available for immediate sale in its present condition. Management also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale, the price is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company also tests assets for impairment when a triggering event occurs or conditions exist. An impairment charge is recognized when the carrying value of the disposal group exceeds the estimated fair value, less transaction costs. Further, the Company will cease to recognize depreciation for assets once classified as held for sale and assets are aggregated on the balance sheet for the period in which the disposal group is held for sale. For comparative presentation, assets and liabilities related to the disposal group will also be aggregated on the balance sheet for the prior period.
There were no assets and liabilities classified as held for sale as of
August 31, 2017
. At
November 30, 2016
assets and liabilities classified as held for sale were comprised of the following:
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(Dollars in Millions)
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November 30, 2016
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Cash
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$
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6.0
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Accounts receivable, net
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12.3
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Other current assets
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1.3
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Inventories, net
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3.0
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Total current assets
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22.6
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Other non-current assets
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3.1
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Total assets
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$
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25.7
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Accounts payable
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$
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4.5
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Other payables
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.7
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Total current liabilities
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$
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5.2
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