Overview
OMNOVA Solutions is a global innovator of performance enhancing chemistries and surfaces for a variety of commercial, industrial, and residential end uses. Our products provide a variety of important functional and aesthetic benefits to hundreds of products that people use daily. We hold 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. We have strategically located manufacturing, technical and other facilities globally to service our broad customer base. Please refer to Item 1. Business, of this Annual Report on Form 10-K for further description of and background on the Company and its operating segments. The Company's Chief Operating Decision Maker ("CODM"), its Chief Executive Officer ("CEO"), makes decisions, assesses performance, and allocates resources prospectively by reporting segment. Segment information has been prepared in accordance with guidance promulgated by the FASB. The Company has two reporting segments: "Specialty Solutions", a segment focused on the Company's higher growth specialty businesses, and "Performance Materials," a segment comprised of the Company's businesses which are focused on more mature markets. These reporting segments were determined based on products and services provided. Accounting policies of the segments are the same as those described in Note A-Description of Business and Significant Accounting Policies of the Company's Consolidated Financial Statements. For a reconciliation of the Company's segment operating performance information, refer to Note P of the Company's Consolidated Financial Statements. A majority of the Company's raw materials are derived from petrochemicals and chemical feedstocks, where prices can be cyclical and volatile. Styrene, a key raw material for the Company, is generally available worldwide, and OMNOVA has supply contracts with several producers. OMNOVA believes there is adequate global capacity to serve demand. OMNOVA's styrene purchases for 2017 through 2019 and the range of market prices were as follows: Pounds Purchased (in millions) Market Price Range Per Pound 2019 91$0.41 -$0.55 2018 102$0.53 -$0.73 2017 129$0.48 -$0.72 Butadiene, a key raw material for the Company, is generally available worldwide, but its price is volatile. OMNOVA has supply contracts with several producers. At times, when the demand for butadiene exceeds supply, it is sold on an allocated basis. OMNOVA's butadiene purchases for 2017 through 2019 and the range of market prices were as follows: Pounds Purchased (in millions) Market Price Range Per Pound 2019 67$0.37 -$0.58 2018 77$0.36 -$0.79 2017 103$0.39 -$1.42
Other key raw materials utilized by the Company include acrylites, polyvinyl chloride (PVC) resins, textiles, and plasticizers. These raw materials are generally available worldwide from several suppliers.
The Company negotiates pricing with a majority of customers considering the value-added performance attributes of those products and the cost of the raw materials. The Company's pricing objective, which may or may not be met, is to recover raw material price increases for non-indexed contracts within three months. OMNOVA had indexed sales price contracts covering approximately 25% of its sales in 2019. These contract indexes are generally comprised of several components: a negotiated fixed amount per pound, and the market price of key raw materials (i.e., styrene and butadiene). The indexed contracts provide that OMNOVA will pass through the increases or decreases of key raw materials, generally within a 30 to 60 day period. Indexed contracts vary in length, generally from 12 to 36 months. Key Indicators Key economic measures relevant to the Company include global economic growth rates, discretionary spending for durable goods, oil and gas consumption and drilling levels,U.S. commercial real estate occupancy rates,U.S. office furniture sales, manufactured housing shipments, housing starts and sales of existing homes, and forecasts of raw material pricing for certain petrochemical feed stocks. Key Original Equipment Manufacturer ("OEM") industries, which provide a general indication of demand drivers to the Company, include commercial and residential construction and refurbishment, automotive and tire production, furniture, flooring, and ABS manufacturing. These measures provide general information on trends relevant to the demand for the Company's products, but the trend information does not necessarily directly correlate with demand levels in the markets which ultimately use the Company's products in part because the Company's market share is relatively small in a number of specialty markets. Key operating measures utilized by the business segments include: orders; sales and pricing; working capital days; inventory; productivity; plant utilization; new product vitality; cost of quality; order fill-rates, which provide key indicators of business trends; and safety and other internal metrics. These measures are reported on various cycles including daily, weekly and monthly, depending on the needs established by operating management. 15 -------------------------------------------------------------------------------- Key financial measures utilized by Management to evaluate the results of its businesses and to understand the key variables impacting the current and future results of the Company include sales and pricing; gross profit; selling, general, and administrative expenses; adjusted operating profit; adjusted net income; consolidated earnings before interest, taxes, depreciation, and amortization ("EBITDA") as set forth in the Net Leverage Ratio in the Company's$350,000,000 Term Loan Credit Agreement; Adjusted EBITDA, working capital; operating cash flows; capital expenditures; cash interest expense; adjusted earnings per share; return on invested capital; and applicable ratios, such as inventory turnover; working capital turnover; return on sales and assets; and leverage ratios. These measures, as well as objectives established by the Company's Board of Directors, are reviewed at monthly, quarterly, and annual intervals and compared with historical periods.
Results of Operations of 2019 Compared to 2018
The Company's net sales in 2019 were$736.2 million , compared to$769.8 million in 2018, a decrease of$33.6 million , or 4.4%. The Specialty Solutions business segment revenue increased by 5.2% and the Performance Materials business segment revenue decreased by 20.9%. Contributing to the net sales decrease in 2019 were lower volume of$21.3 million , unfavorable foreign currency of$11.2 million , and unfavorable price/mix of$1.1 million . Gross profit and gross profit margin in 2019 were$176.2 million and 23.9%, compared to$190.7 million and 24.8% in 2018. The decrease in gross profit margin resulted from lower volumes, primarily within Performance Materials. The decrease in volume was primarily due to the Company's strategic transition away from the commodity paper coatings market and volume reductions in the commodity carpet market, which were partially offset by improved volume in the oil & gas, coatings and performance additives business lines. Selling, general, and administrative expense in 2019 increased$3.5 million or 3.3%, to$109.7 million , compared to$106.2 million in 2018. The increase in 2019 was primarily due to increased outside services as a result of the Synthomer merger transaction and the inclusion of full year expenses of OMNOVAPortugal , which was acquired inSeptember 2018 .
Interest expense was
During the fourth quarter of fiscal 2019, the Company incurred$17.9 million of costs related to initiatives to lower its cost structure. These initiatives involved, among other things, the liquidation of several holding companies inEurope that resulted in the recognition of foreign currency translation losses in the Consolidated Statement of Operations.The Securities and Exchange Commission Staff Accounting Bulletin No.118 ("SAB 118"), provides a measurement period that should not extend beyond one year from the Tax Cuts and Job Act (the "Tax Act") enactment date for companies to complete the accounting under ASC 740, Income Taxes. AtNovember 30, 2018 , the Company had provisionally estimated minimal income inclusion for the transition tax related to foreign earnings on whichU.S. income taxes were previously deferred. UnderSAB 118 guidance, the Company adjusted the income inclusion related to transition tax to$27.7 million . The change is a result of additional analysis, changes in interpretation and assumptions, as well as additional regulatory guidance that was issued. As ofFebruary 28, 2019 , the Company completed the analysis of the impact of the Tax Act in accordance with theSAB 118 and there were no further impacts. The Company utilized existing net operating loss carryforwards to offset the income inclusion, and therefore had no cash taxes related to the transition tax during 2019. Income tax expense was$3.4 million in 2019, compared to income tax benefit of$6.2 million in 2018. The Company's income tax expense was different than the statutory income tax rate due to income in foreign jurisdictions with corresponding tax expense which was not offset by losses in theU.S. jurisdiction in which no tax benefit was recognized. The 2018 income tax benefit was different than the statutory income tax rate primarily due to items related to the Tax Act. As a result of the Tax Act, in 2018 the Company recorded a provisional net tax benefit of approximately$9.9 million , comprised of: a tax benefit of$4.1 million related to the re-measurement of theU.S. deferred taxes for the reduction of theU.S. federal corporate income tax rate; a tax benefit of$0.9 million associated with the reversal of the valuation allowance against the existing AMT credit carryforward as it is refundable under the Tax Act; and a tax benefit of$4.9 million associated with the reversal of the valuation allowance on a portion of theU.S. deferred tax assets as a result of deferred tax liabilities for indefinite lived intangible assets now considered available as a source of income as a result of the Tax Act. In addition, the Company recognized a$0.9 million income tax benefit related to the impact of a French tax rate change on the Company's deferred tax liabilities. Based on French tax legislation enacted during the first quarter of 2018, the French tax rate will be reduced to 25.0% beginning in 2022 and the Company's deferred tax liabilities were reduced to appropriately reflect this legislation as a current period tax benefit in 2018. Segment Discussion The following Segment Discussion presents information used by the Company in assessing the results of operations by business segment. The Company believes that this presentation is useful for providing the investor with an understanding of the Company's business and operating performance because these measures are used by the CODM, its CEO, in making decisions, assessing performance and allocating resources. 16 --------------------------------------------------------------------------------
Year Ended November 30, 2019 2018 (Dollars in millions)Net Sales Specialty Solutions$ 513.0 $ 487.6 Performance Materials 223.2 282.2 Total Net Sales$ 736.2 $ 769.8 Segment Operating Profit Specialty Solutions$ 66.2 $ 70.7 Performance Materials (15.8 ) (9.8 ) Total segment operating profit 50.4 60.9 Interest expense (20.0 ) (19.3 ) Corporate expenses (21.1 ) (24.0 ) Realized foreign currency translation losses (17.9 ) - Merger transaction costs (9.4 ) - Corporate severance (0.3 ) (0.9 ) Operational improvement costs (0.3 ) - Asset impairment (0.1 ) (0.1 ) Acquisition and integration related expense 0.1 (2.2 ) Gain (loss) on sale of assets (0.2 ) 0.9 Debt issuance costs write-off (0.2 ) (0.8 ) Income (Loss) Before Income Taxes$ (19.0 ) $ 14.5
Specialty Solutions
Specialty Solutions' net sales increased$25.4 million , or 5.2%, to$513.0 million in 2019, compared to$487.6 million in 2018. OMNOVA Portugal accounted for$48.0 million of the current year sales increase. The increased sales were primarily driven by improved volumes of$27.5 million , and price/mix of$4.8 million , which were partially offset by unfavorable foreign exchange of$6.9 million . Volume was up in the specialty coatings & ingredients and oil & gas business lines. Net sales for the the specialty coatings & ingredients business line increased$22.9 million to$274.5 million in 2019 compared to$251.6 million in 2018. Net sales for the oil & gas business line increased$13.9 million to$85.2 million compared to$71.3 million in 2018. Net sales for the laminates & films business line decreased$11.4 million to$153.3 million in 2019 compared to$164.7 million in 2018. This segment generated an operating profit of$66.2 million in 2019, compared to$70.7 million in 2018. The decrease in segment operating profit was due largely to increased operating costs partly due to the inclusion of OMNOVA Portugal, partially offset by improved volume and price/mix. Segment operating profit includes items which Management excludes when evaluating the results of the Company' segments. Those items for 2019 totaled$0.3 million and consisted primarily of$0.4 million of restructuring and severance and$0.3 million of acquisition and integration costs. Those items for 2018 totaled$3.7 million and included$1.8 million of acquisition and integration related expense,$1.2 million of asset impairment, facility closure and other costs, and$0.7 million of restructuring and severance charges.
Performance Materials
Performance Materials' net sales decreased$59.0 million ,or 20.9%, to$223.2 million in 2019, compared to$282.2 million in 2018. The decrease in current year sales was driven by lower volume of$48.8 million , unfavorable price/mix of$5.9 million , and unfavorable foreign currency of$4.3 million . Volumes were down primarily in the paper and carpet business line, due to the Company's exit of the commodity paper business line and reduced volumes in the commodity carpet market. Net sales for the paper and carpet business line decreased$49.5 million to$64.1 million in 2019 compared to$113.6 million in 2018. Net sales in the performance additives business line decreased$13.7 million to$110.6 million in 2019 compared to$124.3 million in 2018. Net sales for the coated fabrics' business line increased$4.2 million to$48.5 million in 2019, compared to$44.3 million in 2018. Segment operating losses were$15.8 million in 2019, and$9.8 million in 2018. The segment operating loss in 2019 was primarily due to an asset impairment charge of$7.8 million for the write down of two tradenames related to the performance additives business line. Segment operating profit includes items which Management excludes when evaluating the results of the Company's segments. Those items for 2019 totaled$9.9 million and consisted primarily of$10.7 million of asset impairment, facility closure costs and other,$2.2 million of restructuring and severance,$1.1 million of accelerated depreciation, which were partially offset by a$4.4 million gain on sale of assets. Those items for 2018 totaled$16.7 million and include asset impairments, facility, and other costs of$14.3 million , accelerated depreciation of$1.1 million , restructuring and severance of$1.1 million , and environmental charges of$0.2 million .
Corporate Expenses
Corporate expenses were
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Results of Operations of 2018 Compared to 2017
The Company's net sales in 2018 were$769.8 million , compared to$783.1 million in 2017. The acquisition of Resiquimica in September of 2018 accounted for$10.7 million of current year sales, while our formerChina -based coated fabric manufacturing operation, ("CCF") which was sold in July of 2017, accounted for$10.4 million in sales in 2017. Excluding the effect of CCF, sales decreased$2.9 million or 0.4%. The Specialty Solutions segment revenue increased 10.5% and the Performance Materials segment revenue decreased by 17.4%. Contributing to the net sales decrease of$2.9 million in 2018 were lower volume of$30.5 million , which was partially offset by favorable foreign exchange of$14.7 million and favorable price/mix of$2.5 million . Gross profit and gross profit margin in 2018 were$190.7 million and 24.8%, compared to$200.8 million and 25.6% in 2017. The decrease in gross profit margin resulted from lower volumes, primarily within Performance Materials. Volume decreased primarily due to the Company's continued strategic transition away from the commodity paper coatings market, and the sale of CCF, which were partially offset by improved volumes in the oil & gas, coatings and performance additives business lines. Selling, general, and administrative expense in 2018 decreased$12.4 million or 10.5%, to$106.2 million , compared to$118.6 million in 2017. The decrease in 2018 reflects the One OMNOVA cost reduction initiatives, and reductions in outside services and incentive compensation. OnDecember 22, 2017 ,U.S. federal tax legislation, commonly referred to as the Tax Cuts and Job Act (the "Tax Act") was signed into law which, among other items: reduced theU.S. corporate income tax rate effectiveJanuary 1, 2018 from 35% to 21%; repealed the Alternative Minimum Tax ("AMT"); imposed a one-time transition tax on accumulated foreign earnings not previously subject toU.S. taxation; provides aU.S. federal tax exemption on future distributions of foreign earnings; and beginning in fiscal 2019, creates a new minimum tax on certain foreign-sourced earnings. TheU.S. corporate tax rate reduction resulted in a blended federal statutory tax rate of 22.2% for fiscal 2018 (based on 35% corporate rate throughDecember 31, 2017 and 21% from that date through the end of fiscal 2018).The Securities and Exchange Commission Staff Accounting Bulletin No.118 ("SAB 118"), provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. While the Company was able to make reasonable estimates of the items above, the ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued and actions we may take as a result of the Tax Act. Adjustments to the provisional amounts recorded by the Company that are identified within a subsequent measurement period of up to one year from the enactment date will be included as an adjustment to income tax expense in the period the amounts are determined. Income tax benefit was$6.2 million in 2018, compared to income tax expense of$83.7 million in 2017. The 2018 income tax benefit was different than the statutory income tax rate primarily due to items related to the Tax Act. As a result of the Tax Act, the Company recorded a provisional net tax benefit of approximately$9.9 million , comprised of: a tax benefit of$4.1 million related to the re-measurement of theU.S. deferred taxes for the reduction of theU.S. federal corporate income tax rate; a tax benefit of$0.9 million associated with the reversal of the valuation allowance against the existing AMT credit carryforward as it is refundable under the Tax Act; and a tax benefit of$4.9 million associated with the reversal of the valuation allowance on a portion of theU.S. deferred tax assets as a result of deferred tax liabilities for indefinite lived intangible assets now considered available as a source of income as a result of the Tax Act. In addition, the Company recognized a$0.9 million income tax benefit related to the impact of a French tax rate change on the Company's deferred tax liabilities. Based on recently enacted French tax legislation during the first quarter of 2018, the French tax rate will be reduced to 25.0% beginning in 2022 and the Company's deferred tax liabilities were reduced to appropriately reflect this legislation as a current period tax benefit. The 2017 income tax expense was higher than the statutory income tax rate of 35% primarily as a result of a$79.9 million income tax expense related to valuation allowances on deferred tax assets. Of that amount,$75.7 million income tax expense was recorded in theU.S. during the fourth quarter of 2017. Additionally, a$19.6 million goodwill impairment was recorded in the fourth quarter of 2017 for which no tax benefit was realized as the goodwill impairment is permanently non-deductible for tax purposes. The tax impact of the goodwill impairment was$6.9 million . These charges were partially offset by a$3.4 million income tax benefit from French legislative changes during the year. Segment Discussion The following Segment Discussion presents information used by the Company in assessing the results of operations by business segment. The Company believes that this presentation is useful for providing the investor with an understanding of the Company's business and operating performance because these measures are used by the CODM, its CEO, in making decisions, assessing performance and allocating resources. 18 --------------------------------------------------------------------------------
Year Ended November 30, 2018 2017 (Dollars in millions)Net Sales Specialty Solutions$ 487.6 $ 441.4 Performance Materials 282.2 341.7 Total Net Sales$ 769.8 $ 783.1 Segment Operating Profit Specialty Solutions$ 70.7 $ 59.9 Performance Materials (9.8 ) (12.6 ) Total segment operating profit 60.9 47.3 Interest expense (19.3 ) (21.5 ) Corporate expenses (24.0 ) (24.5 ) Corporate severance (0.9 ) (2.9 ) Asset impairment (0.1 ) (1.8 )
Acquisition and integration related expense (2.2 ) (0.3 ) Gain (loss) on sale of assets
0.9 - Debt issuance costs write-off (0.8 ) - Pension settlement - (0.4 ) Income (Loss) Before Income Taxes$ 14.5 $ (4.1 ) Specialty Solutions Specialty Solutions' net sales increased$46.2 million , or 10.5%, to$487.6 million in 2018, compared to$441.4 million in 2017. The acquisition of OMNOVAPortugal accounted for$10.7 million of the increase. The increased sales were primarily driven by improved volumes of$25.9 million , price/mix of$11.3 million , and favorable foreign exchange of$9.0 million . Volume was up in the specialty coatings & ingredients, oil & gas, and laminates & films business lines. Net sales for the specialty coatings & ingredients business line increased$20.3 million to$251.6 million in 2018 compared to$231.3 million in 2017. Net sales for the oil & gas business line increased$16.7 million to$71.3 million compared to$54.6 million in 2017. Net sales for the laminates & films business line increased$9.2 million to$164.7 million in 2018 compared to$155.5 million in 2017. This segment generated an operating profit of$70.7 million in 2018, compared to$59.9 million in 2017. The increase in segment operating profit was due in part to increased volume, cost reduction initiatives, favorable foreign exchange, and improved price/mix, partially offset by higher raw material and operating costs. Segment operating profit includes items which Management excludes when evaluating the results of the Company' segments. Those items for 2018 totaled$3.7 million and included$1.8 million of acquisition and integration related expense,$1.2 million of asset impairment, facility closure and other costs, and$0.7 million of restructuring and severance charges. Those items for 2017 totaled$0.9 million and included$0.6 million of restructuring and severance charges and$0.3 million of operational improvement costs.
Performance Materials
Performance Materials' net sales decreased$59.5 million , or 17.4%, to$282.2 million in 2018, compared to$341.7 million in 2017. During 2017, the Company sold CCF which accounted for$10.4 million of net sales in 2017. The decrease of$59.5 million was driven primarily by lower volume of$46.0 million , due to the divestiture of CCF of$10.4 million , and unfavorable price/mix of$8.8 million , partially offset by favorable foreign exchange of$5.7 million . Volumes were down, primarily in the paper business line, due to the Company's exit of the commodity portion of the business line. Net sales for the performance additives business line increased$4.8 million to$106.0 million in 2018 compared to$101.2 million in 2017. The coated fabrics' business line net sales decreased$10.9 million to$44.3 million in 2018, compared to$55.2 million in 2017, primarily due to the sale of CCF. Paper and carpet business line net sales decreased$52.9 million to$113.6 million in 2018, compared to$166.5 million in 2017. Segment operating losses were$9.8 million in 2018, and$12.6 million in 2017. The segment operating loss in 2018 was primarily due to an asset impairment charge of$9.2 million related to the styrene-butadiene (SB) production transition fromGreen Bay, Wisconsin toMogadore, Ohio , to offset the impact from lower volumes within the Company's commodity paper business line. Segment operating profit includes items which Management excludes when evaluating the results of the Company's segments. Those items for 2018 totaled$16.7 million and include asset impairments, facility, and other costs of$14.3 million , accelerated depreciation of$1.1 million , restructuring and severance of$1.1 million and environmental charges of$0.2 million . Those items for 2017 totaled$33.3 million and include asset impairment charges and facility closure costs of$33.6 million , restructuring and severance costs of$1.7 million , and a reversal of an environmental charge of$2.0 million .
Interest and Corporate Expenses
Interest expense was$19.3 million and$21.5 million for 2018 and 2017, respectively. The decrease was primarily attributable to the$40.0 million Term Loan B prepayment made during the first quarter of fiscal 2018, resulting in a lower average outstanding debt balance in fiscal 2018 compared to fiscal 2017.
Corporate expenses were
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Restructuring Plans
The Company carried out several key initiatives during 2019 and maintained the following restructuring plans:
2018 Restructuring Plan
During the third quarter of fiscal 2018, the Company announced its plan to close its styrene butadiene manufacturing facility inGreen Bay, Wisconsin , moving production to ourMogadore, Ohio facility. The Company incurred$4.3 million of restructuring and severance expenses in fiscal 2019 related to this plan. Total expense incurred for this plan was$6.1 million , all of which has been paid as ofNovember 30, 2019 . As ofNovember 30, 2019 , the plan was considered complete.
2017 Restructuring Plan
Restructuring and severance activities initiated in 2017 include the One OMNOVA initiative announced during the first quarter of 2017. The One OMNOVA initiative was focused on improving functional excellence in marketing, sales, operations, supply chain and technology, as well as various corporate functions. The plan was designed to reduce complexity and drive consistency across the global enterprise through a standardized, integrated business system. The Company incurred$1.0 million of restructuring and severance expense in fiscal 2019 related to this plan. Total expense incurred for this plan was$6.2 million , all of which has been paid as ofNovember 30, 2019 . As ofNovember 30, 2019 , the plan was considered complete. 2016 Restructuring Plan Restructuring and severance activities initiated in 2016 included continued cost reduction and efficiency improvement actions, as well as a change in the Company's CEO. For these activities, the Company has incurred and paid restructuring and severance costs of$7.6 million . As ofNovember 30, 2018 , the plan was considered complete.
Financial Resources and Capital Spending
The following table reflects key cash flow measures from continuing operations: 2019 2018 2017 (Dollars in millions) Net cash provided by (used in) operating activities$ 24.4 $ 56.7 $ 47.8 Net cash provided by (used in) investing activities$ (30.3 ) $ (46.0 ) $ (28.6 ) Net cash provided by (used in) financing activities$ 2.6 $ (42.7 ) $ (6.6 ) Increase (decrease) in cash and cash equivalents$ (3.2 ) $ (33.9 ) $ 16.0 Cash provided by operating activities was$24.4 million in 2019, compared to$56.7 million in 2018 and$47.8 million in 2017. The$32.3 million decrease in 2019 was primarily due to lower earnings and unfavorable working capital. Working capital days increased 10.0 days to 56.8 days in 2019 compared to 46.8 days in 2018 primarily as a result of the inclusion of OMNOVA Portugal's working capital. The increase in cash provided by operating activities in 2018 was primarily due to higher earnings after consideration of non-cash items and improved working capital. Cash used in investing activities was$30.3 million in 2019, compared to$46.0 million in 2018 and$28.6 million in 2017. The$15.7 million decrease in 2019 was driven by the acquisition of OMNOVA Portugal in 2018 for$22.8 million , and the sale of theGreen Bay, Wisconsin facility and equipment for$4.9 million , partially offset by higher capital expenditures in 2019 of$9.3 million . Included in 2018 are capital expenditures of$23.8 million , primarily related to manufacturing equipment, and the acquisition of OMNOVA Portugal. Included in 2017 were capital expenditures of$25.1 million , primarily related to manufacturing equipment, the acquisition and disposal of businesses of$7.3 million , partially offset by the collection of a$3.8 million note receivable. The Company expects capital expenditures of approximately$30.0 million to$35.0 million during 2020. Cash provided by financing activities was$2.6 million in 2019, compared with a use of$42.7 million in 2018 and a use of$6.6 million in 2017. The$45.3 million improvement in 2019 was driven primarily by a$40.0 million debt prepayment on its Term Loan B in 2018. During 2019, the Company utilized its credit facilities, borrowing$392.7 million and repaying$390.0 million . Cash used in financing activities in 2018, was due primarily to debt repayments of$66.2 million and borrowings of$24.3 million . Cash used in financing activities was$6.6 million in 2017, and was due primarily to debt repayments of$4.2 million and$2.2 million of common shares redeemed in the repayment of employees withholding taxes. OMNOVA's cash balance of$50.9 million atNovember 30, 2019 consists of$10.5 million in theU.S. ,$14.2 million inEurope , and$26.2 million inAsia . As ofNovember 30, 2019 , the Company is not aware of any restrictions regarding the repatriation of its non-U.S. cash.
The Company believes that its cash flows from operations, together with existing credit facilities and cash on hand will be adequate to fund its cash requirements for at least the next twelve months.
Debt
Information regarding the Company's debt is disclosed in Note L to the Company's consolidated financial statements.
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Contractual Obligations
The following table summarizes the Company's contractual obligations for the periods indicated: Payments Due By Period Total 2020 2021 - 2022 2023 - 2024 Beyond 2024 (Dollars
in millions)
Short-term and long-term debt
- Capital lease obligations(1) 17.7 1.3 2.5 2.5 11.4 Interest payments on long-term debt(2) 57.4 16.2 30.6 10.6 - Operating leases 16.0 4.2 5.1 2.3 4.4 Purchase obligations 12.2 12.2 - - - Pension and post-retirement funding obligations(3) 37.2 7.3 14.4 8.3 7.2 Total$ 458.1 $ 44.7 $ 78.6 $ 311.8 $ 23.0
(1) Includes principal and effective interest payments.
(2) Based on outstanding debt balances as of
interest rates. As those are based on estimates, actual future payments may
be different.
(3) Payments are based on Company estimates and current funding laws. As those
are based on estimates, actual future payments may be different.
Significant Accounting Estimates and Management Judgments
The Company's discussion and analysis of its results of operations, financial condition, and liquidity are based upon the Company's consolidated financial statements as ofNovember 30, 2019 , which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Periodically, the Company reviews its estimates and judgments including those related to product returns, accounts receivable, inventories, litigation, 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 materially differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant estimates and assumptions used in the preparation of its consolidated financial statements:
A) Revenue Recognition
The Company recognizes revenues when control of the promised goods is transferred to customers, in an amount that reflects the consideration expected to be received in exchange for those goods in accordance with ASC 606. When recognizing revenue, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
B) Allowance For Doubtful Accounts
The Company's policy is to identify customers that are considered doubtful of collection based upon the customer's financial condition, payment history, credit rating and other relevant factors; and reserves the portion of such accounts receivable for which collection does not appear likely. The allowance for doubtful accounts was$3.4 million and$3.3 million atNovember 30, 2019 and 2018, respectively.
C) Allowance For Inventory Obsolescence
The Company's policy is to maintain an inventory obsolescence reserve based upon specifically identified, discontinued, or obsolete items and a percentage of quantities on hand compared with historical and forecasted usage and sales levels. A sudden and unexpected change in design trends and/or material preferences could impact the carrying value of the Company's inventory and require the Company to increase its reserve for obsolescence. The reserve for inventory obsolescence was$6.1 million and$6.9 million atNovember 30, 2019 and 2018, respectively.
D) Litigation and Environmental Reserves
From time to time, the Company is subject to claims, lawsuits, and proceedings related to product liability, product warranty, contract, employment, environmental, and other matters. The Company provides a reserve for such matters when it concludes a material loss is probable and the amount can be estimated. Costs related to environmental compliance are also accrued when it is probable a loss has been incurred and the amount of loss can be estimated.
E)
The Company accounts for its pension and other post-retirement plans by recognizing in its balance sheet 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). The Company recognizes the change in the funded status of the plan in the year in which the change occurs through Accumulated Other 21 -------------------------------------------------------------------------------- Comprehensive (Loss) Income. As ofMay 2007 , the Company'sU.S. defined benefit pension plan has been closed to all new hires and sinceDecember 1, 2011 , future service benefits have been frozen and fully vested for all participants. Therefore, there is no future service benefit accrual for the Company'sU.S. defined benefit plans. The most significant elements in determining the Company's pension expense are the expected return on plan assets and the discount rate. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years. This produces the expected return on plan assets that is included in pension (expense) income. For ourU.S. plan, the difference between this expected return and the actual return on plan assets is deferred and amortized over the estimated remaining life expectancy of plan participants. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension (expense) income. The Company recorded pension expense of$2.0 million in 2019 and$1.3 million in 2018. Pension expense is calculated using the discount rate to discount plan liabilities at the prior year measurement date. Discount rates of 4.41% and 3.66% were used to calculate the pension expense in 2019 and 2018, respectively. The Company anticipates 2020 expense to be approximately$1.2 million based on a weighted average discount rate of 3.07%. An increase or decrease of 25 basis points in the discount rate would decrease or increase expense on an annual basis by approximately$0.1 million . Cash contributions to the pension plans were$6.5 million in 2019 and$6.3 million in 2018. The Company, in consultation with its actuary, determined the discount rate used to discount theU.S. plan liabilities at the plan's measurement date, which wasNovember 30, 2019 . The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In determining the discount rate, we used spot rates on a yield curve matching benefit payments to determine the weighted average discount rate that would be applied in determining the benefit obligation atNovember 30, 2019 . Changes in discount rates, as well as the net effect of other changes in actuarial assumptions and experience, have been recognized in Accumulated Other Comprehensive Income (Loss). The Company, in consultation with its actuary, determined the discount rate used to measure defined benefit pension plan obligations as ofNovember 30, 2019 should be 3.07%, compared to 4.41% in 2018. A 25 basis point change in the discount rate would increase or decrease the projected benefit obligation by approximately$7.7 million . The Company utilizes an approach that discounts the individual expected cash flows underlying interest and service costs using the applicable spot rates derived from the yield curve used to determine the benefit obligation to the relevant projected cash flows. The spot rates used to determine service and interest costs for 2019 ranged from 3.28% to 4.85%. The ultimate spot rate used to discount cash flows beyond 30 years was 4.83% for 2019. The spot rates used to determine service and interest costs for 2020 expense ranged from 2.05% to 3.61%. The ultimate spot rate used to discount cash flows beyond 30 years was 3.61% for 2020. The use of disaggregated discount rates results in a different amount of Interest Cost compared to the traditional single weighted-average discount rate approach because of different weightings given to each subset of payments. The use of disaggregated discount rates affects the amount of Service Cost because the benefit payments associated with new service credits for active employees tend to be of longer duration than the overall benefit payments associated with the plan's benefit obligation. As a result, the payments would be associated with longer-term spot rates on the yield curve, resulting in lower present values than the calculations using the traditional single weighted-average discount rate. The Company uses theMercer modified version (MRP - 2007) of theSociety of Actuaries' (SOA) Pri-2012 mortality table for the pre-retirement mortality base table. The Company also uses the Mercer Industry Longevity Experience Study (MILES) table for the Chemical, Oil & Gas and Utilities industry and the Consumer Goods and Food & Drink industry for the post-retirement mortality base table. To develop the expected long-term rate of return on assets assumption, the Company, in consultation with its actuary, considered the historical returns and the future expectations for returns for each asset class, as well as the target allocation of the pension portfolio. This resulted in the selection of a long-term rate of return on assets assumption of 7.68% for both 2019 and 2018. The measurement dates ofNovember 30, 2019 and 2018 were used to determine these rates. A 25 basis point change in the assumed rate of return for assets would increase or decrease pension expense by approximately$0.5 million . Pension plan assets are measured at fair value or at Net Asset Value ("NAV") for certain collective trusts on the measurement date. Based on current estimates of pension asset performance, interest and discount rate assumptions, the Company intends to make cash contributions to its pension plans of$6.6 million in 2020.
Factors that could impact future cash requirements and timing of any such cash equivalents are:
• Investment returns which differ materially from the Company's 7.68% return
assumption for 2020;
• Significant changes in interest rates, affecting the discount rate; and
• Opportunities to reduce future cash requirements by accelerating
contributions ahead of the minimum required schedule. Voluntary
contributions in excess of minimally required amounts may prevent the need
for larger contributions in the future.
F) Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using the enacted tax rates that will be in effect in the period the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets, if based on the weight of all available positive and negative evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities along with our effective tax rate in the future. A high degree of judgment is required to determine the extent a valuation allowance should be provided against deferred tax assets. On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a 22 -------------------------------------------------------------------------------- deferred tax asset. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. It is generally difficult to outweigh objectively verifiable negative evidence of cumulative financial reporting losses. As a result of historical restructuring charges and impairments over the last few years, including a significant goodwill impairment recorded in the fourth quarter of 2017, the Company entered into aU.S. jurisdiction three-year cumulative loss position for the three year period endingNovember 2017 . For the three year period endedNovember 2019 , theU.S. jurisdiction remains in a three-year cumulative loss position. Considering the weight of available positive and negative evidence, the Company does not believe the positive evidence (some of which is subjective) overcomes the negative objective evidence of a 3-year cumulative loss position. Therefore, the Company concludes that the valuation allowance should remain on itsU.S. deferred tax assets as ofNovember 30, 2019 . The Company has not provided forU.S. income taxes on undistributed earnings on certain of its non-U.S. subsidiaries as such amounts are considered permanently reinvested outside theU.S. As a result of the Tax Act, to the extent that foreign earnings previously treated as permanently reinvested are repatriated, the relatedU.S. tax liability primarily attributable to withholding taxes may be creditable. However, based on the Company's policy of permanent reinvestment, it is not practicable to determine the income tax liability, if any, which would be payable if such earnings were not permanently reinvested. As ofNovember 30, 2019 , the non-U.S. subsidiaries have cumulative foreign retained earnings of$50.2 million . The Company utilizes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is more-likely-than-not of being realized upon ultimate settlement. The Company's accounting policy for interest and/or penalties related to underpayments of income taxes is to include interest and penalties in income tax expense. For 2019, the Company recognized minimal income tax expense related to interest and penalties. OnDecember 22, 2017 ,U.S. federal tax legislation, commonly referred to as the Tax Cuts and Job Act (the "Tax Act") was signed into law which, among other changes: reduced theU.S. corporate income tax rate effectiveJanuary 1, 2018 from 35% to 21%; repealed the Alternative Minimum Tax ("AMT"); imposed a one-time transition tax on accumulated foreign earnings not previously subject toU.S. taxation; provides aU.S. federal tax exemption on future distributions of foreign earnings; and beginning in fiscal 2019, creates a new minimum tax on certain foreign-sourced earnings. The Tax Act subjects aU.S. shareholder to tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. G) Share-Based Compensation The Company uses the fair value method of accounting to record share-based compensation based on the grant date fair value. While the Company regularly evaluates the use of share-based compensation, its practice has been to issue restricted shares or restricted share units, which are required to be expensed using the fair value method. Beginning with grants in 2018, the Company determined that its performance share awards ("PSA's") would vest and be paid in OMNOVA common shares. The fair value of PSA's, restricted share awards ("RSA's") and restricted share units ("RSU's") is determined based on the closing market price of the Company's common shares at the date of grant. Refer to Note O to the Company's Consolidated Financial Statements for further discussion of share-based compensation.
H) Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and finite-lived intangibles are stated at historical cost less accumulated depreciation and amortization.
Construction in process ("CIP") is not depreciated until the asset is placed in service. Refurbishment costs that extend the useful life of the asset are capitalized, whereas ordinary maintenance and repair costs are expensed as incurred. Interest expense incurred during the construction phase is capitalized as part of CIP until the relevant projects are completed and placed into service. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the estimated disposal price less costs to sell. Depreciation ceases for assets meeting the held-for-sale criteria. During 2018, the Company's Board of Directors approved a plan to close theGreen Bay, Wisconsin plant shifting styrene butadiene manufacturing to its production plant inMogadore, Ohio . As a result, the Company determined that certain plant and equipment were impaired and recognized an impairment charge of$9.2 million , primarily in the Performance Materials segment, to write-down the asset group to fair value based on the market approach analysis. The plant and equipment was sold in 2019 for$4.9 million , recognizing a gain of$4.4 million . Also during 2018, the Company recognized other asset impairment charges of$2.7 million related to idled assets. During the fourth quarter of 2017, due to anticipated lower volumes in the paper market, the Company performed an impairment analysis of the related asset group. Based on this analysis, it was determined that the fair value of the asset group was in excess of the book value, and accordingly, the Company concluded no impairment was necessary.
I)
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination.Goodwill and other indefinite lived intangible assets are tested for impairment at least annually as ofSeptember 1 , and whenever events or circumstances indicate that the carrying amount may not be recoverable. The Company performs the impairment analysis at the reporting unit level using a two-step impairment test. The first step identifies potential impairments by comparing the estimated fair value of a reporting unit with its carrying value. Fair value is typically estimated using a market approach method or a discounted cash flow analysis based 23 -------------------------------------------------------------------------------- on level 3 inputs in the fair value hierarchy, which requires the Company to estimate future cash flows anticipated to be generated by the reporting unit, as well as a discount rate to measure the present value of the anticipated cash flows. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the second step is not necessary. If the carrying value of a reporting unit exceeds the estimated fair value, the second step calculates the possible impairment by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment charge is recognized. As ofNovember 30, 2019 , the estimated fair value of the Company's reporting units exceeded the carrying value of goodwill and therefore, no impairment was recognized. The impairment test for indefinite lived intangible assets consists of comparing the fair value of the asset with its carrying value. The Company estimates the fair value of its indefinite lived intangible assets using a fair value model based on a market approach method or discounted future cash flows. If the carrying amounts exceed the estimated fair value, an impairment loss would be recognized in the amount of the excess. Key inputs used in determining the fair value of the trademarks/tradenames were expected future revenues and royalty rates, and accordingly, their fair value is impacted by selling prices, which for the Company is based in part on raw material costs. As ofSeptember 1, 2019 , the Company performed its annual impairment test for indefinite lived intangible assets and determined that the carrying value of two individual tradenames within the Performance Materials segment were greater than their fair value and, accordingly, recorded an impairment of$7.8 million . A sensitivity analysis was performed by the Company on one of these tradenames and a hypothetical 100 basis point increase in the discount rate used to value this tradename would result in additional impairment of$0.6 million . The second tradename had no remaining fair value. Trademarks and tradenames continue to be important to the Company, and we continue to focus on long-term growth, however, if recent trends continue, the long-term assumptions relative to growth rates and profitability of the trademarks and tradenames may not be attained, which could result in additional impairment to one or more of the Company's trademarks and tradenames. Estimating future cash flows requires significant judgments and assumptions by Management including sales, operating margins, royalty rates, discount rates, and future economic conditions. To the extent that the reporting unit is unable to achieve these assumptions, impairment losses may occur. Finite lived intangible assets, such as customer lists, patents, certain trademarks/tradenames, and licenses, are recorded at cost or estimated fair value when acquired as part of a business combination. Intangible assets with a finite life are amortized over their estimated useful lives with periods ranging from 3 to 53 years.
J) Foreign Currency Translation
The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of operations denominated in foreign currencies are translated intoU.S. dollars at exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates each month during the year. The resulting translation gains and losses on assets and liabilities are recorded in Accumulated Other Comprehensive (Loss) Income, and are excluded from net income until realized through a sale or liquidation of the investment.
K) Leasing Arrangements
Operating lease expenses are recorded on a straight-line basis over the non-cancelable lease term, including any optional renewal terms that are reasonably expected to be exercised. Leasehold improvements related to these operating leases are amortized over the estimated useful life or the non-cancelable lease term, whichever is shorter.
Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments with a corresponding amount recorded in property, plant, and equipment. Current portions of capital lease payments are included inShort-term debt and non-current capital lease obligations are included in Long-term debt in our Consolidated Balance Sheets.
Environmental Matters
The Company's 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 comply with environmental laws and regulations. The Company's Consolidated Balance Sheets as ofNovember 30, 2019 and 2018 reflects reserves for environmental remediation efforts of$1.4 million and$1.5 million , respectively. Capital expenditures for projects related to environmental matters were$0.4 million in 2019,$1.8 million in 2018, and$2.9 million in 2017. During 2019, non-capital expenditures for environmental compliance and protection totaled$10.5 million , all of which were for recurring costs associated with managing hazardous substances and pollution abatement in ongoing operations. Similar non-capital expenditures were$10.0 million and$8.8 million in years 2018 and 2017, respectively. The Company anticipates that non-capital environmental expenditures for the next several years will be consistent with 2019 expenditure levels.
New Accounting Pronouncements
New accounting pronouncements impacting the Company are disclosed in Note A to the Company's consolidated financial statements.
Non-GAAP Financial Measures for Periods Ended
The following discussion includes Non-GAAP financial measures. An explanation of Managements reasons for reviewing and presenting these Non-GAAP measures, and a reconciliation of the Non-GAAP financial measures to GAAP is provided below under the heading "GAAP to Non-GAAP Reconciliations." 24 --------------------------------------------------------------------------------
Management Adjusted Results
Consolidated Results
For the fourth quarter of 2019, segment operating loss was$16.9 million , compared to income of$6.0 million last year. Segment operating loss for the fourth quarter of 2019 included$28.7 million of items primarily related to the recognition of foreign currency translation losses, intangible asset impairments in the Performance Materials segment, and costs related to the Company's proposed merger with Synthomer, which was announced onJuly 3, 2019 . Segment operating profit for the fourth quarter of 2018 included$9.0 million of items primarily related to asset impairment charges and costs for the closure of the Company'sGreen Bay, Wisconsin facility andPortugal acquisition costs. Adjusted Segment Operating Profit, which excludes those items, was$7.0 million for the fourth quarter of 2019, compared to$10.1 million for the fourth quarter of 2018. (See tables A and B). Adjusted Diluted Earnings per Share were$0.11 for the fourth quarter of 2019, compared to$0.17 last year. The decline was primarily due to the weakness in the laminates & films business line and in the overall Performance Materials segment, partially offset by strength in the Company's oil & gas and adhesives & sealants business lines. For the twelve months endedNovember 2019 , segment operating profit was$1.1 million , compared to$33.8 million in the prior year. The 2019 result included$38.6 million of items primarily related to a restructuring of the Company's European holding company structure, costs relating to the Company's proposed merger with Synthomer, severance and restructuring, accelerated depreciation, and intangible asset impairment costs. The 2018 results included$23.5 million of items primarily related to asset impairment charges, costs for the closure of the Company'sGreen Bay, Wisconsin facility, and OMNOVA Portugal acquisition costs. Adjusted Segment Operating Profit, excluding those items, was$19.7 million for the twelve months endedNovember 2019 , compared to$38.0 million for the prior year. Adjusted Diluted Earnings per Share were$0.33 for 2019, compared to$0.63 last year. Adjusted EBITDA was$70.0 million for 2019, compared to$86.3 million last year. Adjusted Segment EBITDA was down for Specialty Solutions, at$86.1 million for 2019 compared to$92.0 million in the prior year. Adjusted Segment EBITDA for Performance Materials declined by$13.6 million , from$18.1 million at the end ofNovember 2018 to$4.5 million at the end ofNovember 2019 . The decline primarily reflects the impact of the Company's decision to exit the commodity paper market, volume weakness in the carpet market and weakness in the tire cord market. During 2019, the Company experienced broad economic pressures inAsia and in theU.S. recreational vehicle markets, which resulted in lower demand in several key markets including recreational vehicles, construction, automotive and tires.
Specialty Solutions Segment Results
For the fourth quarter of 2019, Specialty Solutions operating profit was$16.9 million , compared with$15.7 million in the fourth quarter of 2018. Adjusted Segment Operating Profit for Specialty Solutions was$16.9 million , or 14.0% of net sales, compared to$17.8 million , or 13.9% of net sales, last year. (See Tables A and B). The Company's oil & gas business line again demonstrated strong growth in revenue and profit during the quarter, as the Company's differentiated offerings continue to find traction with end users. The growth in the oil & gas business line, together with continued new product success in the Company's adhesive & sealants business line, and above-plan performance by the Company's Portuguese business (acquired inSeptember 2018 ), was offset by declines in the Company's laminates & films and elastomeric modifiers business lines. The laminates & films business line continued to see challenging conditions in its end markets (particularly in recreational vehicles) while the elastomeric modifiers business line was particularly impacted by a slow Asian market and weaker automotive markets globally. For the twelve months endedNovember 2019 , Specialty Solutions operating profit was$66.2 million , compared with$70.7 million last year. Specialty Solutions Adjusted Segment Operating Profit for the year was$66.5 million , or 13.0% of net sales, compared to$74.4 million , or 15.3% of net sales, for the comparable period last year. (See Tables A and B.) The period-to-period decline was the result of a slow start to the year in nonwovens, declines in elastomeric modifiers related to a slow Asian market and weaker automotive markets generally, as well as overall weakness in laminates & films (particularly in recreational vehicles). While the oil & gas business line's contribution to Specialty Solutions Adjusted Segment Operating Profit was up by approximately 40% from the prior period, it was not sufficient to offset the aforementioned declines. In 2019, the Company's vitality index for Specialty Solutions is 20.7%, up from 19.3% last year. Profit margins from the Company's new product portfolio in Specialty Solutions has increased by 340 basis points and is now accretive to overall specialty margins.
Performance Materials Segment Results
Performance Materials' segment operating loss for the fourth quarter of 2019 was$9.5 million , compared with a loss of$4.2 million for the fourth quarter of last year. Performance Materials Adjusted Segment Operating Loss for the quarter was$2.4 million , compared to income of$1.9 million last year. (See Tables A and B.) The primary drivers of the year-over-year decline include the Company's exit from the commodity paper market, volume reductions in the commodity carpet market, and increased competitive intensity in tire cord markets. These declines were partially offset by growth in the reinforcing resins market and the benefits of closing the Company'sGreen Bay, Wisconsin plant, which are expected to yield annual benefits of$7.0 million to$8.0 million by the second half of 2020. Performance Materials' segment operating loss for 2019 was$15.8 million , compared with a loss of$9.8 million for the prior year. Performance Materials Adjusted Segment Operating Loss in 2019 was$5.8 million , compared to income of$6.9 million in the prior year. (See Tables A and B.) The primary drivers of the decline are consistent with those of the quarter, and were partially offset by the benefits of closing the Company'sGreen Bay, Wisconsin plant. The challenges in commodity-based markets like paper and carpet continue to mask the more positive performance of the Company's smaller but more profitable Performance Materials business lines, including the Company's coated fabrics and reinforcing resins business lines. The segment is continuing to execute its strategy of growing the profitable Performance Materials business lines while reducing exposure to less profitable business lines through reducing direct costs, repurposing assets, and reducing exposure in the segment's most commoditized end markets. 25 --------------------------------------------------------------------------------
Non-GAAP and other Financial Matters Three Months Ended November 30, 2019 Table A (In millions except per share Specialty Performance Combined data) Solutions Materials Segments Corporate Consolidated Net Sales$ 120.3 $ 48.9 $ 169.2 $ -$ 169.2 Segment Operating Profit / Corporate Expense$ 16.9 $ (9.5 ) $ 7.4 $ (24.3 ) $ (16.9 ) Interest expense - - - (4.8 ) (4.8 ) Income (Loss) Before Income Taxes$ 16.9 $ (9.5 ) $ 7.4 $ (29.1 ) $ (21.7 ) Management Excluded Items Restructuring and severance .1 - .1 .1 .2 Acquisition and integration related expense .3 - .3 (.4 ) (.1 ) Merger transaction costs - - - 4.0 4.0 Other financing costs (.4 ) - (.4 ) - (.4 ) Realized foreign currency translation losses - - - 17.9 17.9 Asset impairment, facility closure costs and other - 7.1 7.1 - 7.1 Subtotal for management excluded Items - 7.1 7.1 21.6 28.7 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 16.9 $ (2.4 ) $ 14.5 $ (7.5 ) $ 7.0 Income tax expense (25% rate)* (1.8 ) Adjusted Income (Loss) $ 5.2 Adjusted Diluted Earnings Per Share from Adjusted Income$ 0.11
*Income Tax rate is based on the Company's estimated normalized annual effective tax rate
Adjusted Segment Operating Profit as a % of sales 14.0 % (4.9 )% 8.6 % Segment /Corporate Capital Expenditures$ 5.9 $ 1.3 $
7.2 $ - $ 7.2
Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 16.9 $ (2.4 ) $ 14.5 $ (7.5 ) $ 7.0 Unallocated corporate interest expense - - - 4.7 4.7
Segment / Consolidated Adjusted
EBIT 16.9 (2.4 ) 14.5 (2.8 ) 11.7 Depreciation and amortization excluding accelerated depreciation 5.0 2.8 7.8 .2 8.0
Segment / Consolidated Adjusted
EBITDA$ 21.9 $ 0.4 $
22.3
Adjusted EBITDA as a % of sales 18.2 % 0.8 % 13.2 % 11.6 % 26
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Non-GAAP and other Financial Matters (Continued) Three Months Ended November 30, 2018 Table B (In millions except per share Specialty Performance Combined data) Solutions Materials Segments Corporate Consolidated Net Sales$ 127.6 $ 63.7 $ 191.3 $ -$ 191.3 Segment Operating Profit / Corporate Expense$ 15.7 $ (4.2 ) $ 11.5 $ (5.5 ) $ 6.0 Interest expense - - - (4.9 ) (4.9 ) Income (Loss) Before Income Taxes$ 15.7 $ (4.2 ) $ 11.5 $ (10.4 ) $ 1.1 Management Excluded Items Restructuring and severance - .7 .7 .2 .9 Accelerated depreciation on production transfer - .7 .7 - .7 Acquisition and integration related expense 1.9 .2 2.1 1.5 3.6 Gain on sale of assets - - - (.9 ) (.9 ) Asset impairment, facility closure costs and other .2 4.5 4.7 - 4.7 Subtotal for management excluded Items 2.1 6.1 8.2 .8 9.0 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 17.8 $ 1.9 $ 19.7 $ (9.6 ) $ 10.1 Income tax expense (25% rate)* (2.5 ) Adjusted Income (Loss) $ 7.6 Adjusted Diluted Earnings Per Share from Adjusted Income$ 0.17
*Income Tax rate is based on the Company's estimated normalized annual effective tax rate
Adjusted Segment Operating Profit as a % of sales 13.9 % 3.0 % 10.3 % Segment /Corporate Capital Expenditures$ 8.1 $ 2.7 $
10.8
Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 17.8 $ 1.9 $ 19.7 $ (9.6 ) $ 10.1 Unallocated corporate interest expense - - - 4.9 4.9
Segment / Consolidated Adjusted
EBIT 17.8 1.9 19.7 (4.7 ) 15.0 Depreciation and amortization excluding accelerated depreciation 4.6 2.6 7.2 - 7.2
Segment / Consolidated Adjusted
EBITDA$ 22.4 $ 4.5 $
26.9
Adjusted EBITDA as a % of sales 17.6 % 7.1 % 14.1 % 11.6 % 27
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Non-GAAP and other Financial Matters (Continued) Twelve Months Ended November 30, 2019 Table C (In millions except per share Specialty Performance Combined data) Solutions Materials Segments Corporate Consolidated Net Sales$ 513.0 $ 223.2 $ 736.2 $ -$ 736.2 Segment Operating Profit / Corporate Expense$ 66.2 $ (15.8 ) $ 50.4 $ (49.3 ) $ 1.1 Interest expense - - - (20.0 ) (20.0 ) Income (Loss) Before Income Taxes$ 66.2 $ (15.8 ) $ 50.4 $ (69.3 ) $ (18.9 ) Management Excluded Items Restructuring and severance .4 2.2 2.6 .3 2.9 Accelerated depreciation on production transfer - 1.1 1.1 - 1.1 Operational improvements costs - - - .3 .3 Acquisition and integration related expense .3 .4 .7 (.1 ) .6 (Gain) on sale of assets - (4.4 ) (4.4 ) .2 (4.2 ) Debt issuance costs write-off and additional interest - - - .2 .2 Merger transaction costs - - - 9.4 9.4 Other financing costs (.4 ) - (.4 ) - (.4 ) Realized foreign currency translation losses - - - 17.9 17.9 Asset impairment, facility closure costs and other - 10.7 10.7 .1 10.8 Subtotal for Management Excluded Items .3 10.0 10.3 28.3 38.6 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 66.5 $ (5.8 ) $ 60.7 $ (41.0 ) $ 19.7 Tax expense (25% rate)* (4.9 ) Adjusted Income (Loss)$ 14.8 Adjusted Diluted Earnings Per Share from Adjusted Income$ 0.33 *Tax rate is based on the Company's estimated normalized annual effective tax rate Adjusted Segment Operating Profit as a % of sales 13.0 % (2.6 )% 8.2 % Segment /Corporate Capital Expenditures$ 23.2 $ 8.2 $ 31.4 $ 1.7 $ 33.1 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 66.5 $ (5.8 ) $ 60.7 $ (41.0 ) $ 19.7 Unallocated corporate interest expense - - - 20.0 20.0
Segment / Consolidated Adjusted
EBIT 66.5 (5.8 ) 60.7 (21.0 ) 39.7 Depreciation and amortization excluding accelerated depreciation 19.6 10.3 29.9 .4 30.3
Segment / Consolidated Adjusted
EBITDA$ 86.1 $ 4.5 $
90.6
Adjusted EBITDA as a % of sales 16.8 % 2.0 % 12.3 % 9.5 % 28
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Non-GAAP and other Financial Matters (Continued) Twelve Months Ended November 30, 2018 Table D (In millions except per share Specialty Performance Combined data) Solutions Materials Segments Corporate Consolidated Net Sales$ 487.6 $ 282.2 $ 769.8 $ -$ 769.8 Segment Operating Profit / Corporate Expense$ 70.7 $ (9.8 ) $ 60.9 $ (27.1 ) $ 33.8 Interest expense - - - (19.3 ) (19.3 ) Income (Loss) Before Income Taxes 70.7 (9.8 ) 60.9 (46.4 ) 14.5 Management Excluded Items Restructuring and severance .7 1.1 1.8 .9 2.7 Accelerated depreciation on production transfer .1 1.1 1.2 - 1.2 Asset impairment, facility closure costs and other 1.1 14.3 15.4 .1 15.5 Environmental costs - .2 .2 - .2 Gain on sale of assets - - - (.9 ) (.9 ) Deferred financing fees written-off - - - .8 .8 Acquisition and integration related expense 1.8 - 1.8 2.2 4.0 Subtotal for management excluded items 3.7 16.7 20.4 3.1 23.5 Adjusted Segment Operating Profit / Corporate Expense before Income Taxes$ 74.4 $ 6.9 $ 81.3 $ (43.3 ) $ 38.0 Tax expense (25% rate)* (9.5 ) Adjusted Income$ 28.5 Adjusted Diluted Earnings Per Share from Adjusted Income$ 0.63 *Tax rate is based on the Company's estimated normalized annual effective tax rate Adjusted Segment Operating Profit as a % of sales 15.3 % 2.4 % 10.6 % Segment /Corporate Capital Expenditures$ 16.9 $ 6.0 $ 22.9 $ .9 $ 23.8 Adjusted Segment Operating Profit / Corporate Expense Before Income Taxes$ 74.4 $ 6.9 $ 81.3 $ (43.3 ) $ 38.0 Unallocated corporate interest expense - - - 19.3 19.3
Segment / Consolidated Adjusted
EBIT 74.4 6.9 81.3 (24.0 ) 57.3 Depreciation and amortization excluding accelerated depreciation 17.6 11.2 28.8 .2 29.0
Segment / Consolidated Adjusted
EBITDA$ 92.0 $ 18.1 $
110.1
Adjusted EBITDA as a % of sales 18.9 % 6.4 % 14.3 % 11.2 %
Shareholder Communications Pending the Merger
Pending its merger with Synthomer, the Company has suspended the distribution of earnings releases and has discontinued earnings teleconferences, and the Company's shareholders should not rely on any existing forward-looking guidance or on the Company issuing any future forward-looking guidance. The Company currently expects to obtain all remaining antitrust and other regulatory approvals that are required for the completion of the merger in early 2020. However, the Company cannot guarantee when any such approvals will be obtained, or that they will be obtained at all. Please refer to the disclosures concerning risk factors relating to the consummation of the merger.
Forward Looking Statements
This Annual Report includes forward looking statements as defined by federal securities laws. Please refer to Item 1A. Risk Factors of this Report, which is incorporated herein by reference.
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