OMNOVA faces stiff headwinds in Q2 with record high raw costs

29 Jun '11

5 min read

OMNOVA Solutions Inc announced Net Income of $6.2 million, or $0.14 Diluted Earnings per share, for the second quarter ended May 31, 2011. This compares to Net Income of $15.1 million, or Diluted Earnings Per Share of $0.33 for the second quarter of 2010. In the second quarter of 2011, there were a number of non-recurring charges totaling $1.1 million resulting primarily from the acquisition of specialty chemicals producer ELIOKEM.

Excluding these items, Adjusted Net Income for the second quarter of 2011 was $7.3 million, with Adjusted Diluted Earnings Per Share of $0.16, as compared to the Adjusted Pro Forma Net Income of $12.8 million or $0.29 per diluted share for the second quarter of 2010. The Adjusted Net Income for the second quarter of 2011 also includes, net of tax, unrecovered raw material costs of $2.4 million, lower margin on weaker volumes of $ 2.2 million, foreign exchange currency losses of $1.8 million and new plant start-up costs of $ 0.3 million. The Diluted Earnings Per Share impact of these items was approximately $(0.14).

"The Company faced stiff headwinds in the second quarter with record high raw material costs, weaker demand in certain end-use markets and start-up costs for a new plant in China," said Kevin McMullen, OMNOVA Solutions' Chairman and Chief Executive Officer. "In the face of these market challenges, our second quarter results, while below our prior expectations, reflect the Company's improved, more robust and global business model. The integration of ELIOKEM has added numerous innovative products, expanded our penetration into new and adjacent markets and accelerated the globalization of our business."

Gross profit in the second quarter of 2011 increased to $65.1 million, compared to $47.2 million in the second quarter of 2010, primarily due to the ELIOKEM acquisition. Raw material costs in OMNOVA's legacy business increased $26.3 million in the second quarter versus the same period last year. Gross profit margins in the second quarter of 2011 were 19.7%, compared to margins of 20.8% in the second quarter of 2010. The decline in gross profit margin percentage was due primarily to the significant raw material inflation; the effect of Performance Chemicals index pricing in which higher raw material costs are passed to customers, subject to a contractual time lag, with no gross margin benefit; new plant start-up costs; and changes in product mix.

Selling, general and administrative expenses (SG&A) in the second quarter of 2011 increased to $34.3 million, or 10.4% of sales, compared to $25.6 million, or 11.3% of sales, in the second quarter of 2010. The increase of $8.7 million in SG&A was primarily due to the ELIOKEM acquisition. The decline as a percentage of sales was due to higher sales and the Company's focused ongoing efforts to control costs and to leverage SG&A across its global operations and growing revenue base.

As of May 31, 2011, the Company's debt of $457.2 million was comprised of $250.0 million of 7.875% Senior Notes maturing in 2017, a term loan of $197.2 million maturing in 2016 and $10.0 million of foreign borrowings. Cash and cash equivalents totaled $79.5 million. There were no outstanding borrowings under the Company's U.S. revolving asset-based credit facility and the available borrowing capacity was $94.9 million.

More OMNOVA Solutions Inc News... More Textiles News - United States Of America...